What is the Awesome Oscillator? How Does It Work in Trading?

Understanding Awesome Oscillator

The Awesome Oscillator (AO) is a technical indicator used to measure the market momentum. It calculates the difference between a 34-period and a 5-period simple moving average (SMA). In this, the simple moving average is not calculated using the closing price, but rather it is calculated using the mid-points of each candlestick's bar.

AO also uses a zero line in the centre, either side of which price movements are plotted according to a comparison of 34-period and 5-period moving averages.

Here is the image of the Nifty price chart with an Awesome Oscillator placed in it.

Formula of Awesome Oscillator

The Awesome Oscillator involves calculating two moving averages, which are subtracted from different period SMA to get the final figure. Follow the steps below.

Step 1: Calculate the 5-period SMA using the midpoint of each candlestick's bar.

• Midpoint price of a candle = (High + Low) / 2
• Take the midpoint price of the last 5 candlesticks.

Step 2: Calculate the 5-period SMA using the midpoint of each candlestick's bar.

• Midpoint price of a candle = (High + Low) / 2
• Take the midpoint price of the last 34 candlesticks.

Step 3: Subtract the 34-period SMA from the 5-period SMA.

• Awesome Oscillator formula = 5-period SMA - 34-period SMA.

How Does the Awesome Oscillator Work?

The Oscillator fluctuates above or below zero, indicating changes in the momentum of securities.

When the histogram bar is above the zero line (centre line), signals market momentum is bullish, and prices are expected to rise. Here, the numerical figure of the oscillator is positive.

However, when the histogram bar is below the zero line, signals market momentum is bearish, and prices are expected to fall. Here, the numerical figure of the oscillator is negative.