When it comes to technical analysis tools for trading, oscillators are there to warn you of a possible trend reversal. The RSI, Stochastic Oscillator, and Parabolic SAR are all used for this purpose.
The Awesome Oscillator is no different. It serves the purpose of measuring market momentum, as well as anticipated trend reversals.
How to use the Awesome Oscillator
Seasoned traders employ a number of methods to get the Awesome Oscillator to give them entry and exit points. There are 3 popular ones, namely;
Zero Line Cross
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ZERO LINE CROSS
This is the most widely-used of AO methods. When the AO crosses the zero line from below, it's considered a bullish trend. Conversely, when it does so from above, that's take as a bearish buying opportunity.
This trading signal involves two peaks (oscillations) which remain either below or above the zero line. Let's look at a bullish trend (upwards) for example. In this scenario we are looking for the AO (Awesome Oscillator) to have the peaks below the zero line, and the second peak must be situated higher (closer to the zero line) than the first one. Another thing to look for is that the first bar on the second peak must be green! The trough must also remain below the zero line. Take a look at the image below.
You can clearly see that the second peak is closer to the zero line than the first one, and the trough (blue circle) is also below the line.
When it comes to a bearish trend, it's exactly the opposite. The trough is above, and the following candlestick on the second peak must be red.
Looking at the Marks & Spencer stock chart, you can clearly see the bearish Twin Peaks setup.
The third and final setup used with the Awesome Oscillator is known as the Saucer Method.
This method involves looking at the behaviour of three consecutive sticks, all of which must be on the same side of the zero line. In a bullish trend you have two red candlesticks, followed by a green one. The second red stick must be lower than the first. Look at the Marks&Spencer chart below for an illustration of the Bullish Saucer Method.
During a Bearish Saucer setup, you get the exact opposite. Two green bars, with the second one being closer to the zero line, followed by a red one.
The Deutsche Bank chart above clearly shows what the Bearish Saucer setup looks like.
The Awesome Oscillator (AO) can be a very valuable tool for any trader, and as with any indicator, it's advisable to complement it with another tool. You could use another oscillator like the RSI, for instance. We have looked at all oscillators indicators. Now let's get into one used for commodity trading, and that's the CCI. Click here to learn more.