Awesome Oscillator (AO) – What It Is & How to Trade with It

Awesome Oscillator (AO) – What It Is & How to Trade with It

What is the Awesome Oscillator (AO)?

The Awesome Oscillator (AO) is a momentum indicator developed by Bill Williams to measure market momentum and trend strength. It is based on the difference between two Simple Moving Averages (SMAs)—a shorter-term SMA (5-period) and a longer-term SMA (34-period).

The AO formula is:
AO = SMA(5, Median Price) – SMA(34, Median Price)

Where:

• Median Price = (High + Low) / 2
• SMA(5, Median Price) = 5-period SMA of the median price.
• SMA(34, Median Price) = 34-period SMA of the median price.

Key Features of Awesome Oscillator

• Measures market momentum with a histogram.
• Identifies trend strength and potential reversals.
• Can be used in combination with other indicators for confirmation.

How to Use Awesome Oscillator in Forex Trading

1. Zero Line Crossover Strategy

AO helps traders confirm trend direction based on the zero line:

• Buy Signal: When AO crosses above zero, indicating bullish momentum.
• Sell Signal: When AO crosses below zero, indicating bearish momentum.

Trading Tip: A strong cross above zero after a prolonged downtrend suggests a trend reversal.

2. Twin Peaks Strategy

AO’s twin peaks pattern identifies potential reversals:

• Bullish Twin Peaks: Two consecutive lows in AO below zero, with the second low being higher (buy signal).
• Bearish Twin Peaks: Two consecutive highs in AO above zero, with the second high being lower (sell signal).

3. Saucer Strategy

The saucer pattern occurs when AO changes from bearish to bullish momentum:

• Buy when: Two consecutive green AO bars appear above zero.
• Sell when: Two consecutive red AO bars appear below zero.

4. AO with Moving Averages

Pairing AO with a moving average (e.g., 50 EMA) helps confirm trade signals:

• Buy when: AO is above zero & price is above the 50 EMA.
• Sell when: AO is below zero & price is below the 50 EMA.

Pros and Cons of Using Awesome Oscillator

✅ Pros:

• Simple and easy to interpret.
• Effective in confirming trends.
• Works well with other indicators for trade validation.

❌ Cons:

• Can produce false signals in ranging markets.
• Requires additional confirmation for best results.

Final Thoughts

The Awesome Oscillator (AO) is a versatile momentum indicator that helps traders spot trend shifts, confirm momentum, and detect potential reversals. When used alongside moving averages or divergence analysis, AO enhances trade accuracy and decision-making.