In early September, we discussed Bill Williams' Awesome Oscillator in the article on indicator presentation. We also did an analysis and found that the indicator - like so many others - also has a weakness in sideways phases. The reason for this is that he is strongly following course. It is based on moving averages - and these are known to run after the course.
However, this is not a problem, because the majority of technical indicators follow the course, which is not surprising, as most will calculated from the course. The question that is important here and which we asked ourselves in the article is: Can the indicator be optimized so that it delivers good signals?
Strategy with the Awesome Oscillator Indicator
What we also noticed was the fact that the indicator could not only be used as a trend following indicator, but is also suitable for reverse detection. Therefore we want to try to build a strategy on it.
The upper chart makes it clear that important reversals were definitely identifiable with the AO indicator. A signal would result in the histogram if the color of the bars changed and the subsequent bars became shorter. Another indication should be that the reversal is based on a high or low in the indicator. However, since the indicator is very lagging, we start looking for an indicator that can confirm the reversal again.
Force index indicator
We find what we are looking for in the force index indicator. This indicator was developed by Alexander Elder and is based on the price change and the volume converted. In addition to the price as the basis for calculation, we also have the price-independent factor volume on board in our trading technology.
We can see that the Force Index sometimes even has a lead to the AO indicator. That is a huge advantage. He has confirmed almost all reversals by either making a higher low or a lower high. In our identified reversals, it only happened once that the Force Index had fallen, but the AO indicator did not show any clear signals (red arrow).
Since the Force Index is leading, it is being developed Trading system is less the confirmation, but rather rated with the AO indicator or the AO indicator is more likely to be a confirmation of the Force Index. The rule is: Both indicators must point to a reversal - regardless of which one does it first.
But something is missing: Both indicators can provide signals, but we have not set a price pattern for a risk-conscious entry to reach. This is usually one of the most difficult tasks, because it is not difficult to identify a reversal, but where do you put the stop, for example?
Therefore, the entry only takes place when the high / low of the reversal candle from the next one is overcome. In our case, there would have been no entry for the first reversal because the subsequent candles were all below the high. Only the fifth candle overcame the high. As you can see, it is too late, because the course falls shortly afterwards. It is therefore important that at least the second candle overcomes the high. If the first two candles do not, no entry will be made. On the other hand, an entry has been made for the following identified reversals:
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Awesome oscillator indicator - trading simply explained
If you want to deal with the various trading strategies in advance before deciding on a procedure, you are already familiar with some special features and options of the AO indicator. Nevertheless, there are some basic things to consider when trading.
Conclusion - Not all indicators can be optimized well
We therefore summarize. The trading technique is based on two indicators and is traded according to the following rules:
- The AO indicator and the Force Index must display a reversal.
- The AO indicator is a reversal given when the bars change color and become shorter. A relevant high / low is also decisive.
- The Force Index shows a reversal if it falls after a high or rises after a low, i.e. it forms lower lows or higher highs.
- The Entry takes place only when the high / low of the reversal candle is at least overcome by the second following candle; otherwise no entry despite the first rules.
The AO indicator certainly has its strengths. However, it is very lagging and, as the example has shown, it has to be optimized to such an extent that in the end it serves rather as confirmation. In addition, it is questionable whether one could not do without it in this case. Nevertheless, as a simple technical tool it is quite usable, one shouldn't expect miracles. However, this is generally not recommended.
Here you will find information on the
- DeMarker indicator
- short-term trading with DeMarker indicator
- indicators as trading systems.