Introduction To The Bill Williams Awesome Oscillator Indicator
Awesome Oscillator (AO) indicator is a non-limiting momentum indicator that provides insight into the weakness or the strength of a security.
The Awesome Oscillator (AO) indicator is used to measure market momentum and to affirm trends or to anticipate possible reversals.
It does this by effectively comparing the recent market momentum, with the general momentum over a wider frame of reference.
The Awesome indicator similar to the MACD and other indicators uses a zero line crossover along with histograms to determine the bullish or bearish forces in various trading platforms like the stock and commodity markets.
- Bill Williams Awesome Oscillator Indicator for Beginners
- Calculation of the Awesome Oscillator
- The Significance of Using Bill Williams Awesome Oscillator Indicator
- Feasibility of the Bill Williams Awesome Oscillator Indicator
- How to Use the Bill Williams Awesome Oscillator Indicator
- Trading the Bill Williams Awesome Oscillator Indicator
- Pros and Cons of Using the Bill Williams Awesome Oscillator Indicator
- Analysis of the Bill Williams Awesome Oscillator Indicator
- Awesome Oscillator Conclusion
- FAQ about the Bill Williams Awesome Oscillator Indicator
- Bill Williams Awesome Oscillator Indicator Infographic
Bill Williams Awesome Oscillator Indicator for Beginners
The Awesome Oscillator is a beginner friendly indicator that is constructed in a simple manner that is easy to understand.
The Awesome Oscillator shows the market momentum or market driving force over red bar and green bar histograms. The histograms are differentiated in terms of direction by the zero line.
This makes it easy for beginners to understand if the market has overpowering bullish momentum or bearish momentum.
Calculation of the Awesome Oscillator
The Awesome Oscillator value is calculated by taking the difference between the 34 and the 5 period simple moving averages while considering the midpoint values instead of closing prices.
The Awesome Oscillator formula is:
Midpoint value = (Bar high – Bar low) / 2
Awesome Oscillator = SMA 5- SMA34
The histrogram bars colour will differ when compared to the previous value of the Awesome Oscillator.
If the current value is less than the previous, it will be red.
On the other hand, if the current value is more than the previous value it will be green.
In addition, negative values that show bearish momentum will be shown as a histogram bar below the zero line, while positive values that show bullish momentum will be shown as a histogram bar above the zero line.
The Significance of Using Bill Williams Awesome Oscillator Indicator
The significance of using the awesome oscillator as compared to other indicators like the MACD is that first of all, the Awesome Oscillator is calculated based on median price while the calculations of the MACD line is based on closing price.
Secondly, the Awesome Oscillator utilises the 34 period and 5 period simple moving averages while the MACD utilises the 26 period and 12 period exponential moving averages along with a 9 period signal line.
In other words, since exponential moving average captures the momentum of the market while giving more weight to the recent price changes, the MACD would more of a leading indicator as compared to the Awesome Oscillator.
This shows that MACD has a faster reflection of the market and works better as a short term momentum indicator as compared to when the trader use the Awesome Oscillator.
However, this does not mean that the MACD is a better indicator to measure momentum. The choice of selecting momentum indicators are ultimately still based on your style of trading and the type of trading set ups you have on hand.
Feasibility of the Bill Williams Awesome Oscillator Indicator
The Awesome Oscillator is a feasible indication of market momentum as it is calculated simply by using the difference of two simple moving averages.
This meaning that it obtains momentum values on a equal weightage based on the median price across certain periods as compared to the MACD that gives more weightage on the recent closing prices.
This shows that the momentum valuation derived will be different and provides a larger scope for the trader interpreting the results, especially for long swings.
Furthermore, the usage of the zero line would provide information when the market’s overall momentum is low and indicates when the potential trend direction is about to reverse.
The trend reversals are then shown as a confirmation by the zero line crossover of the histograms.
How to Use the Bill Williams Awesome Oscillator Indicator
To use the Awesome Oscillator, the trader must firstly be familiar with the indicator itself.
Next it is crucial to know how the Awesome Oscillator applied.
This means recognising the representations of the histogram patterns as well as divergence trading methods with the Awesome Oscillator.
Furthermore, it is also important to understand the basic concepts of support and resistance to be able to identify stop loss levels.
There are different trading strategies for the Awesome Oscillator.
From the conventional zero line crossover trading strategy, twin peaks trading strategy and the awesome oscillator saucer trading strategy.
This article’s analysis will be based on the zero line crossover strategy. However, we will cover the rest in brief.
The twin peaks strategy is a simplified way of divergence trading with the Awesome Oscillator indicator. The strategy involves identifying bullish and bearish trades by locating two consecutive peaks.
The bullish twin peaks set up involves locating two peaks below the zero line with the trough staying below the zero line.
The second peak must be smaller or in other words higher than the first, showing a loss of bearish momentum.
The bearish setup for the twin peak strategy is the opposite of the bullish counterpart.
The saucer strategy requires the trader to identify three consecutive bars of the same colour on the histogram to obtain a bullish signal or a bearish signal.
For a bullish setup, the trader looks to find two red bars and a green bar, with the subsequent red bar (2nd bar) being smaller than the previous one. Entry will be on the fourth green bar.
The bearish setup will be the opposite of the bullish counterpart.
Also Read: Elliott Wave and Its Rules
Trading the Bill Williams Awesome Oscillator Indicator
To apply the zero line crossing over strategy, enter the trade on the first bar when the histogram crosses the zero line.
For a bullish position, enter on the first green bar when the histogram crosses the zero line.
For a bearish position, enter on the first red bar when the histogram crosses the zero line.
Similar to the entry signal, the exit signal is given where the histogram crosses the zero line of the opposing direction.
The stop loss would be determined by key levels of support and resistance.
Pros and Cons of Using the Bill Williams Awesome Oscillator Indicator
The pros of using this indicator is that it is able to identify the momentum strength of the trend.
It is also able to identify and allow traders to trade the divergence, allowing for more flexibility in trading style while providing a larger scope of insight.
Finally, it also is able to distinguish the dominating bullish or bearish power separately from the general momentum of the trend.
However, the strategy relies heavily on support and resistance to determine stop loss, which can ultimately be subjective.
Also, the strategy is unable to provide an optimum point of entry into the market.
Analysis of the Bill Williams Awesome Oscillator Indicator
To find out the profitability of the Awesome Oscillator strategy, we decided to do a back test based on the past 10 trades from 1 october 21 on the H4 timeframe.
The rules for entry will be the same as what was mentioned above.
We will be back testing this throughout 3 types of trading vehicles, namely, EURUSD for forex, US30(DJI) for stocks and BTCUSD for cryptocurrency.
For simplicity, we will assume that all trades taken have a risk of 1% of the account.
Avg Risk reward ratio= ( Total risk reward ratio of winning trades/ total no. of wins)
Profitability (% gain)= (no. of wins* reward)- (no of losses*1) [ Risk is 1%]
An example of the application of the strategy is as shown:
For the Back test results, trades with blue and yellow zones indicate an overall win with the blue zone as reward and the yellow zone as the risk taken.
As shown in our back test, the win rate of this strategy for EURUSD (Forex) is 60%, US30 (Stocks) is 70% and BTC (Crypto) is 60%.
The average risk reward ratio of this strategy for EURUSD (Forex) is 1.04 US30 (Stocks) is 1.13 and BTC (Crypto) is 1.11.
The profitability of this strategy for EURUSD (Forex) is 2.24, US30 (Stocks) is 4.91 and BTC (Crypto) is 2.66.
Awesome Oscillator Conclusion
In conclusion, The Awesome Oscillator zero line crossing over strategy may not be the best in terms of finding an entry into the market, nor is it the best at achieving good risk to reward ratio. However, it is definitely reliable in terms of win rate and profitability nonetheless. This indicator provides flexibility to trading by giving a wide scope of information from the market and allows it to be used widely throughout many trading strategies.
FAQ about the Bill Williams Awesome Oscillator Indicator
In our article we answered the following Frequently Asked Questions about the Awesome Oscillator:
- What is the Awesome Oscillator?
- Is the Awesome Oscillator better than the MACD?
- What is the Awesome Oscillator Saucer strategy?
- What are the best Awesome Oscillator trading strategies?
Bill Williams Awesome Oscillator Indicator Infographic