Indicators for Traders #1 "Awesome Oscillator"

Hi Steemians, we will open a new window for traders. We will examine the indicators on bitcoin.

Today we will start with the “Awesome Oscillator” indicator. Firstly we will give the meaning of this indicator and apply it for long term short term analysis for both bitcoin and steem to check whether analysis makes profit or not.

Let’s start. Awesome Oscillator is a tool which is created by Bill Williams and described by him in his book “New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities” [1]. This tool calculates the momentum of the price trend. What does momentum mean? You can think momentum as a quantity of the motion. In physics momentum can be found p=mv [link], it mean that you have a mass and velocity then the product of these two gives you its momentum it means that the speed of the movement of price over time. In money chart, you have a value (price) as a weight, and some oscillations which is equal to speed. The formula is,

AO = SMA(High+Low)/2, 5 Periods) - SMA(High+Low/2, 34 Periods) [2]

SMA means “simple moving average”. SMA(High+Low)/2, 5 Periods) takes five bars and take SMA of these bars. (High + Low)/2 means average of the that bar. Then take a difference between SMA of 5 bars (short range) and SMA of 34 bars(long range). It means that there is a distribution of short range on the long range. This is important because by using short and long range you can understand the sharp increasing and decreasing of the movements of the bar. We could not understand why Williams chose 5 and 34 bars (We are searching about this issue).

After decribing the meaning of the indicator, lets move how can we interpret the indicator. We are new for this so we are searching lots of article and we try to give an explained one.

Zero Line:

Zero line is the key parameter for this indicator. If there is a passing thorough this line it indicates that the momentum is changing which means that you can buy or sell. As understood, if the changing from negative to positive, it means you can buy. If the changing from positive to negative, it means you can sell. You can say zero line, as a “new trend” [1].

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Divergence:

It means that the bars are increasing with an attenuation. So be careful about this there can be some dropping about the price [1].

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Convergence:

This is opposite behaviour than divergence. So the trend shows a increasing indication. So you can buy in this condition due to indicating arising about the price[1].

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There is also a correction depth but we do not see any effect so skipped it.

Ok, we learned how we interpret the the lines. By the way we did not mention about green and red bars. Green bars mean there is a increasing trend but red bars are decreasing trend for your money chart .

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STRATEGIES

There are lots of strategies about “awesome oscillator” but we will give two of them which are really important and effect for us.

Twin Peak

Ths strategy is so easy to understant. If you have a such a chart:

For selling:

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As you see the positive part which inludes the arrows. We can say that there is a decreasing manner. If you see two green peaks with a decreasing according to each other (2. Peak smaller than 1. peak) than you need sell.

For buying:

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As you see the negative part which inludes the arrows. We can say that there is a increasing manner. If you see two red peaks with a decreasing (absolute value of red bars) according to each other (2. Peak smaller than 1. peak) than you need buy.

Trend Line:

The second strategy is the trend line. You can apply this method to make a decision when you change the sell or buy attitude. If you can combine this method and first method it will be much more helpful.

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Up to here, we tried to give interpretations and methods to use “awesome oscillator” indicator. From this day we will apply this rule and after one we will share the results.

Also we will examine an another indicator.

See you next week...