Awesome Oscillator. Part 1: basic concepts and classical signals

• VFX Blog
• For beginners

As you know, trading on a trend is the most profitable strategy for binary options, but it is extremely difficult to determine the moment of its beginning and especially the end. In order not to lose a significant part of profit due to late entry into the market, a complex analysis of the current situation is required and an assessment of dynamics price movement will be its integral part. One of the best tools to solve this problem is the Awesome Oscillator (AO) indicator.

Calculation method

The author of the indicator Bill Williams in his book “New Dimensions of Exchange Trading” considers it to be the best tool for analyzing price movements in any financial market and requires nothing more for successful trading. In the terminal, AO is displayed in the form of a histogram, columns of which are difference of two simple Moving Averages:

MA (34, Close) - MA (5, Medium)

Using average prices (Medium) instead of closing prices (Close) gives a smoother dynamics, due to which Awesome Oscillator has a lower signal delay, compared to most oscillators.

Setting

AO indicator is included in the basic set of all popular binary trading platform, such as MetaTrader, in the basic version it has only setting of additional levels and colours of histogram columns. By default, green, if the close of the current bar is higher than previous, below is red.

The author claims that there is no point in changing base periods of Moving Averages since they are optimal for any period and trading asset. It is difficult to agree with a formulation, given that analyzed daily charts, where market “noise” and short-term speculative actions do not significantly affect medium- and long-term strategies.

Therefore, options with customizable periods were developed to work in more volatile conditions; good binary signals were obtained on combinations of 7/24 and 10/36.



Awesome Oscillator signals, in addition to changing trend, also indicate the onset of market overbought/oversold, for which indicator has a set of appropriate levels. Compared to RSI and Stochastic, there is a filtering of false signals in the form of a histogram colour and we stay out of the market when it does not match signal. Also, AO does not have the property of "sticking" in extreme zones with long-term trends.

The simplest signal to open a deal will be a change in the colour of the histogram:

• For the opening on a trend, the colour of the bar: green-buy, red-sell;

• Open option a reversal trend, the histogram must be opposite colour. At the beginning of uptrend changes from red to green, for a downtrend from green to red.

Williams claims that you can enter right after the colour change, but such an entry is still too risky. A trend change on any timeframe does not occur immediately, for some time the market continues to move from a reversal or gives a short-term correction. Therefore, according to the binary options guide, wait for 2-3 bars and only then open it. It is also not out of place to have confirmation from the Momentum indicator.

In addition to the colour change, there are several signal patterns:

«Saucer»

The signal says that correction or rollback has completed and most likely the trend will resume:

• CALL option: a histogram is above zero lines and a characteristic pattern is formed, the structure of which is shown in the picture.

• PUT option: a histogram below zero, expiration behind the maximum of the first bar.

A signal bar is a fully formed (closed) bar of the histogram, the colour of which does not change!

“Zero level breakdown”

A classic oscillator signal indicating final trend change:

• CALL option: the point where histogram changes from negative to positive and new bars close above previous ones. The signal will be first green after the breakout level from bottom-up, Stop Loss is located 3-5 points below the minimum bar before the breakout point.

• PUT option: opposite conditions: histogram becomes negative, the signal bar is red.

In the image, pay attention to the first and last breakout of zero levels. In the first case, we have a speculative movement (usually news) that sharply turned oscillator and gave a false signal to buy. The opposite situation is on right: AO confirmed signal of candlestick pattern and you can safely open it. When studying how binary options signals work, be sure to look at the market situation: maybe some factors cancel even a strong signal!

Divergence 

The discrepancy in the movement of price chart and oscillators is one of the strongest signals of an imminent change in the current trend and longer the divergence forms, stronger new trend.  At the bullish divergence, we are waiting for opening point of SELL and BUY on bearish.

The image shows examples of obvious divergence, but such situations are extremely rare. Usually, divergence is less pronounced, it is difficult to see them without sufficient practice, especially for beginners. Special indicators such as Awesome Oscillator Divergence can help, signals of which will be the starting point for detailed analysis.

«Two peaks»

This model can be called "flat divergence", which can result in both a reversal and a continuation of sideways movement – this is the only first sign of a change in the balance of power between buyers and sellers. The binary options signal should appear before crossing zero levels!

An important note: with a green histogram there is no signal for sale, respectively, there are no purchases on red AO. The second significant point: if the signal is fully formed, but not broken by the current price, followed by a change in the colour of the histogram, then the signal is cancelled.

In the second part of the article, read how to increase the reliability of binary options strategy with Awesome Oscillator and recommendations for use.