An indicator that has “Awesome” in its name must be truly amazing, there is no doubt. This indicator was invented by Bill Williams, an American trader and author of books on trading psychology, who also invented such famous indicators as Alligator and Fractals.
What is so awesome about the Awesome Oscillator (AO)? This indicator is considered a “simplified version of MACD” by many traders. It is true, the AO indicator is a simple to read histogram, the purpose of which is to reflect the market momentum, confirm trends and find the possible trend reversal points.
How does it work?
The Awesome Oscillator calculates the difference between a 34-period and 5-period Simple Moving Averages. The MAs are calculated based on the midpoints of each candlestick, rather than the opening or closing prices. The generated values are plotted as red and green bars around the baseline of the indicator.
- A bar of green color indicates that its value is higher than the previous one. A red bar signals that it is lower than the previous bar.
When the indicator’s values are above the zero line, it means that the short-term trend is higher than the long-term trend. When the histogram is below the zero line, it means that the short-term trend is falling faster than the long-term trend.
Based on this, there are several strategies that traders can use with the Awesome Oscillator.
Awesome Oscillator strategies
As the AO indicator is quite universal, traders can apply these strategies to any trading instrument and any timeframe. These approaches can be combined with each other for better results, too.
Baseline Crossover
The first and, possibly, most obvious strategy that you can try, is the zero line crossover. The principle of this approach is the following:
- When the bars are crossing from below above the baseline (a bullish crossing), it may be a signal for a “Higher” or “Buy” position.
- When the bars are moving from above to below the zero line (a bearish crossing), it might be an opportunity to go “Lower” or “Sell” the asset.
Traders may enter a deal once the zero line is crossed in the described way.
Twin Peaks
Another signal traders may be looking out for in the Awesome Oscillator is the formation of two peaks, which forecasts a soon change in the trend. In order to take advantage of this signal, traders need to know the following:
- A Bullish Twin Peaks occurs when two peaks are formed below the zero line. It is important to note that the second peak should be placed higher than the first one, but both of them (and the bars in between) must stay under the baseline. The second peak should be followed by a green bar.
- A Bearish Twin Peaks signal can be received when the two peaks are formed above the baseline. The second peak is lower than the first one and it is followed by a red bar. Both peaks and the bars in between have to stay above the baseline.
Traders may enter the deal once they’ve noticed the two peaks and the first bar after them form.
Saucer
The Saucer strategy looks for a continuation of the trend, rather than a reversal. It takes 3 bars into consideration and can indicate more rapid changes in momentum. When implementing this approach, make sure to note the following:
- For a Bullish Saucer signal, the indicator’s bars should stay above the zero line. Two consecutive red bars (with the second one being lower than the first) need to be followed by a green bar. This indicates an upward direction of the price movement.
- A Bearish Saucer signal is received when the AO bars are under the zero line. Two consecutive green bars (with the second one being higher than the first one) are followed by a red bar, which indicates a bearish trend.
Awesome Oscillator for Binary Options
The Awesome Oscillator can be applied to all trading instruments, which makes it suitable for short-term deals on Binary Options as well. For example, you can combine AO with Moving Averages to form a powerful Binary Options strategy. Let’s take a closer look at how to work with it.
Awesome Oscillator and Moving Averages strategy
Awesome Oscillator can be combined with two Moving Averages with periods of 5 and 34 in order to double check the signal for a trend reversal. In order to utilize it, you can do the following:
- Set up the Awesome Oscillator according to its default settings
- Choose a Simple Moving Average and set its period to 5
- Choose another Simple Moving Average with a 34-period and make sure to assign it a different color
To implement this strategy, a trader needs to look for a crossover between the two MAs as well as a crossover of the baseline of the Awesome Oscillator.
- When the fast MA (5) crosses the slow MA (34) from below above, and the AO shows a bullish crossing, it may be a signal to trade Higher.
- When the fast MA (5) crosses the slow MA (34) from above below, and the AO shows a bearish crossing, it may be a signal to trade Lower.
Example
As an example, let’s test this strategy on a 10-second chart of EUR/USD Binary. This deal is executed minding the following steps:
- Waiting for a crossing between the two Moving Averages. In the example it is clearly seen how the fast MA (red color) is crossing the slow MA (yellow) from below above, stating an emerging uptrend.
- Receiving a confirmation from the AO indicator — in this case it indicates a reversal of the trend, as bars have crossed from below the baseline to above it.
- A deal “Higher” is placed once the confirmations are received.
- The deal closes higher and with a profit, as seen on the next screenshot.
Divergence
While it is a helpful tool, as any indicator, the Awesome Oscillator can’t guarantee 100% accurate predictions and profitable results. Occasionally, a divergence may occur, which means that the indicator is stating the opposite of the market — for instance, a decline, while the market is on the rise.
In order to protect your funds, it is always advisable to double check all received signals and implement risk management tools in any strategy.
Awesome Oscillator settings
To set up the Awesome Oscillator on the IQ Option platform, first find it in the “Popular” section of the indicators list in the left bottom corner of the traderoom. The indicator is ready to be used with the standard settings, though, if needed, they can be adjusted.
Click “Apply” and the indicator will appear in your traderoom. Good luck!
