Awesome Oscillator Indicator: How To Use and Interpret It

What is the Awesome Oscillator

The Awesome Oscillator is a technical indicator that helps you determine whether bullish or bearish momentum is driving the market.

It measures the difference between a short-term moving average (5-period SMA) and a longer-term moving average (34-period SMA) based on the median price instead of the closing price.

This indicator appears as a histogram of bars fluctuating around a zero line, making it easy to visualize shifts in momentum.

How Does the Awesome Oscillator Work

At its core, the Awesome Oscillator compares recent price momentum to a broader trend.

• When the shorter-term momentum exceeds the longer-term momentum, it indicates a bullish trend.

• On the other hand, if the short-term momentum is weaker than the long-term trend, it signals bearish pressure in the market.

What Is the Awesome Oscillator Formula

The Awesome Oscillator formula is:

Where:

• Median Price = (High + Low) / 2

• SMA = Simple Moving Average

The difference between these two SMAs forms a histogram that traders use to analyze momentum shifts.

Understanding the Histogram Colors

• Green bars: Indicate that the current bar is higher than the previous one, suggesting growing bullish momentum.

• Red bars: Indicate that the current bar is lower than the previous one, signaling weakening bullish or increasing bearish momentum.

How to Read the Awesome Oscillator

To effectively use the Awesome Oscillator in forex markets, stocks, or crypto, you should focus on three main trading signals that indicate potential trend reversals.

Key Signals Traders Look For

Here are the three main signals to look for when reading the awesome oscillator:

1. Zero Line Crossover

2. Twin Peaks Signal

3. Saucer Setup

Zero Line Crossover

• When the histogram crosses above the zero line, it signals a bullish shift, suggesting traders consider buying.

• When the histogram crosses below the zero line, it indicates a bearish shift, signaling traders to consider selling.

Twin Peaks Signal

• Bullish Twin Peaks: Occurs when two peaks are above the zero line, with the second peak higher than the first. This signals a potential uptrend continuation.

• Bearish Twin Peaks: Happens when two peaks are below the zero line, with the second peak lower than the first. This suggests a strong downtrend.

Saucer Setup

• A bullish saucer pattern forms when the histogram shows two red bars followed by a green bar, indicating that bearish momentum is fading.

• A bearish saucer pattern forms when two green bars are followed by a red bar, suggesting that bullish momentum is weakening.

How to Interpret Bullish vs. Bearish Signals

Interpreting the market direction witht he awesome oscillator is relatively easy.

A rising histogram with green bars suggests increasing bullish pressure, meaning traders may look for buying opportunities.

A declining histogram with red bars indicates growing bearish momentum, which might be a signal to short the market.

Awesome Oscillator vs. Other Indicators

While the Awesome Oscillator (AO) is an effective momentum indicator, traders often compare it with other tools like the Accelerator Oscillator (AC), MACD, and RSI to refine their strategies.

Each indicator serves a unique purpose, and understanding their differences can help you make more informed decisions.

Awesome Oscillator vs Accelerator Oscillator

Both the Awesome Oscillator (AO) and the Accelerator Oscillator (AC) were developed by Bill Williams, but they serve different functions.

In short, AO is used to confirm market trends, while AC is more sensitive to shifts in momentum, making it useful for early trend detection.

Awesome Oscillator vs MACD

The Awesome Oscillator vs. MACD comparison is one of the most common among traders. Both indicators measure momentum but have significant differences.

In short, AO is simpler, focusing purely on momentum, while MACD provides additional entry signals with its signal line.

Traders who prefer early trend recognition often use AO, while those looking for stronger confirmation signals prefer MACD.

Awesome Oscillator vs RSI

The Relative Strength Index (RSI) and the Awesome Oscillator serve different purposes but can complement each other.

RSI is useful for mean-reversion trading (buying low, selling high), while AO helps confirm trend strength and momentum shifts.

Awesome Oscillator Trading Strategies

The AO offers a range of momentum-based trading strategies that allow you to identify high-probability trade setups. Here are some awesome oscillator trading strategies that you can consider.

Divergence Trading Strategy

One of the most effective ways to use the Awesome Oscillator is through divergence trading.

A bullish divergence occurs when the price forms lower lows, but the AO histogram forms higher lows.

This suggests that downward momentum is weakening, and a potential trend reversal is imminent. You can enter long positions when the price confirms the reversal with higher highs.

On the other hand, a bearish divergence forms when the price makes higher highs, but the AO histogram forms lower highs.

This indicates decreasing bullish momentum, often leading to a market reversal to the downside. Short positions can be taken when the price starts forming lower lows after the divergence is confirmed.

Breakout Confirmation Strategy

Breakouts are high-momentum events that lead to sharp price movements, and the Awesome Oscillator can help confirm valid breakouts from false breakouts.

When price breaks above resistance, the AO histogram should show a strong positive reading, preferably with a series of increasing green bars.

This confirms that bullish momentum is strong, and traders can enter a buy trade with more confidence.

On the other hand, if price breaks below support, but AO fails to show strong bearish momentum (e.g., mixed green and red bars), the breakout might be a false signal, and the market could retrace back into the range.

The best way to use AO in breakout trading is to combine it with volume indicators or trend-following indicators like Bollinger Bands to confirm whether the breakout has sufficient momentum.

Using AO for Scalping and Day Trading

For scalpers and intraday traders, the Awesome Oscillator settings for day trading can be adjusted to make it more sensitive to quick price changes.

Instead of the default 5-SMA and 34-SMA settings, you can experiment with a 3-SMA and 21-SMA combination to capture short-term momentum shifts faster.

A common approach is to trade AO histogram color changes:

• Enter a buy trade when the AO histogram shifts from red to green (indicating increasing bullish momentum).

• Enter a sell trade when the AO histogram shifts from green to red (indicating increasing bearish momentum).

For best results, this method should be combined with support and resistance levels, as price reversals near key levels tend to have higher success rates.

Backtesting Awesome Oscillator Strategies

Before using AO in live trading, it's crucial to backtest Awesome Oscillator strategies on historical data to validate their effectiveness.

To backtest your awesome oscillator strategies, follow the below steps:

1. Choose a Trading Platform: Use MetaTrader 4/5 or other platforms with historical data and backtesting tools.

2. Select a Market and Timeframe: Forex, stocks, and crypto markets work well. H1 and H4 timeframes are ideal for trend-based strategies.

3. Apply the Awesome Oscillator and Set Entry/Exit Rules: Use a clear trading plan with well-defined entry & exit criteria. Combine AO with other indicators for better confirmation.

4. Analyze Past Performance: Look for win/loss ratio, drawdowns, and risk-reward ratio. Identify common mistakes using Awesome Oscillator to refine your strategy.

5. Optimize and Adjust: Modify AO settings for different markets to improve performance. Use trailing stops & risk management techniques to protect capital.

Common Mistakes using Awesome Oscillator

When using the awesome oscillator indicator, make sure to avoid the below mistakes:

1. Ignoring confirmation signals: Using AO alone can lead to false signals. Always confirm with other indicators.

2. Over-trading signals: Not every zero line crossover or saucer pattern leads to a successful trade. Be selective.

3. Using the wrong time frame: Awesome Oscillator settings for day trading should differ from those for swing trading or long-term investing.

Conclusion

The Awesome Oscillator is a versatile tool that helps you anticipate market momentum, spot trend reversals, and confirm trading opportunities.

Whether you're using it for forex trading, stocks, or crypto, understanding its signals and combining it with other technical indicators can lead to more informed trading decisions.