Detrended Price Oscillator (DPO)

Name Type Prerequisite Use Cases
Detrended Price Oscillator (DPO) Momentum/Cycles SMA Identifying cyclical highs and lows without trend interference.

Definition

The Detrended Price Oscillator (DPO) is an indicator designed to remove the long-term trend from prices, making it easier to identify potential cycles and overbought/oversold levels. Unlike other oscillators, DPO is not a momentum indicator but rather a price oscillator that highlights peaks and troughs in price relative to a displaced moving average.

Mathematical Equation

\[ DPO = \text{Price close} - SMA_n(\frac{n}{2} + 1 \text{ periods ago}) \]

Usually, \(n=20\). The specific displacement allows the indicator to compare the current price to a past average, effectively removing the trend influence up to that timeframe.

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: Unbounded
  • Behavior: Oscillates around zero, removing the long-term trend to highlight short-term price cycles.

Visualization

Detrended Price Oscillator

Trading Significance

  1. Cycle Identification: DPO is helpful for identifying the length of price cycles. The distance between peaks or troughs on the DPO can correspond to the cycle length.

  2. Overbought/Oversold: Peaks and troughs in the DPO often align with reaction highs and lows in price.

  3. Trend Confirmation: Since it compares price to a past average, determining if the price is significantly deviated from its "norm" can signal reversions.