How does the awesome oscillator work?
Let us understand how it works through an example:
1. The scenario
- You are analysing the price movement of a stock listed on the National Stock Exchange (NSE) over a 50-day period.
- Say the 5-day Simple Moving Average (SMA) of the stock's price is Rs. 200, and the 34-day SMA is Rs. 195.
- We can observe that the difference between these two SMAs is Rs. 5.
- We represent this difference as a histogram bar.
2. The price surge
- Say the stock's price keeps rising.
- After a few days:
- The 5-day SMA increases to Rs. 205
- The 34-day SMA increases to Rs. 198
- Now, the difference between the two SMAs is Rs. 7.
- This made the histogram bar grow taller.
3. The momentum
Based on the histogram formed, we can spot the market momentum. See the two possible outcomes below:
| Parameters |
The stock's price keeps rising consistently |
The stock's price starts to decline |
| Effect |
- The gap between the two SMAs widens
- The histogram bars get taller
|
- The gap between the two SMAs narrows
- The histogram bars get shorter
|
| Indication |
Bullish momentum |
Bearish momentum |
| Action |
Buy |
Sell or short |
4. The outcome
- By observing the awesome oscillator histogram, we visually assessed whether the market momentum is:
- Strengthening, or
- Weakening
What is the awesome oscillator formula
As discussed above, the awesome oscillator involves calculating two moving averages, which are then subtracted. Follow the steps mentioned below:
Step I
Calculate the 5-period Simple Moving Average (SMA) of the midpoint price:
- Midpoint price = (High + Low) / 2
- Take the midpoint price for each of the last 5 periods and average them.
Step II
Calculate the 34-period Simple Moving Average (SMA) of the midpoint price:
- Take the midpoint price for each of the last 34 periods and average them.
Step III
Subtract the 34-period SMA from the 5-period SMA:
- Awesome oscillator formula = 5-period SMA - 34-period SMA
Now, let us understand each of these components individually:
| Parameters |
Mid-point price |
5-period SMA |
34-period SMA |
Awesome oscillator |
| Meaning |
This is the average price between the high and low of each period. |
This is the simple moving average of the midpoint prices over the last 5 periods. |
This is the simple moving average of the midpoint prices over the last 34 periods. |
This is the difference between the 5-period SMA and the 34-period SMA. |
| Importance |
It's used to smooth out the price data and remove noise. |
It helps to identify short-term trends in the market. |
It helps to identify long-term trends in the market. |
- It is used to assess the momentum of the market.
- The positive values indicate bullish momentum.
- The negative values indicate bearish momentum.
|
Hypothetical example to better understand the calculation
The share prices of ABC Ltd. have the following midpoint prices for the last 5 periods:
Period 1:
- Midpoint price = (High 1 + Low 1) / 2 = (100 + 90) / 2 = 95
Period 2:
- Midpoint price = (High 2 + Low 2) / 2 = (105 + 95) / 2 = 100
Period 3:
- Midpoint price = (High 3 + Low 3) / 2 = (110 + 100) / 2 = 105
Period 4:
- Midpoint price = (High 4 + Low 4) / 2 = (115 + 105) / 2 = 110
Period 5:
- Midpoint price = (High 5 + Low 5) / 2 = (120 + 110) / 2 = 115
Now, we calculate the 5-period SMA:
- 5-period SMA = (95 + 100 + 105 + 110 + 115) / 5 = 105
Similarly, based on the mid-point prices for the last 34 periods, we can calculate, a 34-period SMA. In this case, let us assume it to be 100.
By subtracting the 34-period SMA from the 5-period SMA, we can calculate the awesome oscillator:
- Awesome oscillator = 105 (5-period SMA) - 100 (34-period SMA) = 5
So, in this example, we can observe that the value of the awesome oscillator value is 5. This positive value indicates bullish momentum.
Awesome oscillator trading strategies
Most traders use the signal offered by the awesome oscillator to guide their trading decisions, including entry and exit from the market. Let us have a look at some popular trading strategies:
1. Zero-line cross-strategy
- Traders opt for buying when the awesome oscillator moves upward, crossing over the zero line from below.
- This event signals a transition from bearish to bullish momentum.
- Conversely, traders choose to sell or short when the oscillator crosses below the zero line from above.
- This event signifies a transition from bullish to bearish momentum.
2. Twin peaks strategy
- The twin peaks strategy focuses on identifying two peaks above and below the zero line on the awesome oscillator histogram.
- A weakening bullish trend is established when:
- The second peak is lower than the first one, and
- Both are above the zero line
- A weakening bearish trend is established when:
- The second peak is higher than the first one, and
- Both are below the zero line
3. Saucer strategy
- The saucer strategy involves identifying a series of histogram bars moving from negative to positive values (or vice versa).
- This pattern indicates a gradual shift in momentum.
- Traders enter long positions when the histogram bars transition from negative to positive values.
- On the other hand, traders initiate short positions when histogram bars transition from positive to negative values.
Conclusion
Traders widely use the awesome oscillator to gauge market momentum. By comparing recent price movements with longer-term averages, traders identify whether buying or selling pressure is increasing or decreasing in the market.
It also involves using various trading strategies such as the zero line cross strategy, twin peaks strategy, and saucer strategy, which guide traders when to enter or exit positions.
