Awesome Oscillator (AO)

Name Type Prerequisite Use Cases
Awesome Oscillator (AO) Momentum SMA Confirming trends and spotting "Twin Peaks" signals.

Definition

The Awesome Oscillator (AO) is a market momentum indicator used to measure market momentum. It calculates the difference between a 34-period Simple Moving Average (SMA) and a 5-period SMA. The SMAs are calculated using the midpoints of the bars (\((\text{High} + \text{Low}) / 2\)) rather than closing prices.

Mathematical Equation

\[ \text{Median Price} = \frac{\text{High} + \text{Low}}{2} \]
\[ AO = SMA_5(\text{Median Price}) - SMA_{34}(\text{Median Price}) \]

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: Unbounded
  • Behavior: Oscillates around a zero line, showing market momentum by comparing a 5-period and 34-period SMA.

Visualization

Awesome Oscillator

Trading Significance

  1. Zero Line Cross:

    • Bullish: AO crosses from below to above the zero line.

    • Bearish: AO crosses from above to below the zero line.

  2. Saucer Strategy: A setup seeking to buy on a "bullish saucer" (two red bars followed by a green bar above zero) or sell on a "bearish saucer" (two green bars followed by a red bar below zero).

  3. Twin Peaks:

    • Bullish: Two lows below the zero line, where the second low is higher than the first.

    • Bearish: Two highs above the zero line, where the second high is lower than the first.