AO (Awesome oscillator)
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The Awesome oscillator (AO) – as it is named in one of the books by Bill Williams - is absolutely analogous to the MACD indicator. Like the MACD, it is a classic oscillator and gives the same reversal signals for the current movement. The only innovation that Bill Williams introduced into this indicator is that it is plotted not by closing prices, like the classic MACD, but by median prices.
When calculating the value of AO at a specific time interval, the parameter of the 34-period MA is subtracted from the 5-period moving average indicator. If the fast moving average is above the slow one, the AO value will be positive and the oscillator plots bars above the zero mark. The stronger the trend, and the more the moving average diverge, the longer the bars are drawn up (with an uptrend) or down (with a downtrend).
Unlike the MACD, Awesome oscillator does not have an additional moving average, and all indicator signals are based on the behavior of the histogram, the position of the bars relative to each other, and their crossing of the zero line.
Indicator signals to watch out for:
Zero line cross – When the AO crosses above the zero line, short-term momentum now rises faster than long-term momentum. This can provide a bullish buying opportunity. When the AO crosses below the zero line, short-term momentum now falls faster than long-term momentum. This can provide an opportunity for a bearish sell;
Twin peaks – this is a method that takes into account the differences between two peaks on the same side of the zero line. A bullish Twin peaks setup occurs when there are two peaks below the zero line. The second peak is higher than the first, followed by a green bar. A bearish Twin peaks setup occurs when there are two peaks above the zero line. The second peak is lower than the first, followed by a red bar;
Saucer – this setup is looking for faster changes in momentum. The Saucer method looks for changes in three consecutive bars on the same side of the zero line. The bullish Saucer setup occurs when the AO is above the zero line. This entails two consecutive red bars (the second bar is below the first) followed by a green bar. The bearish Saucer setup occurs when the AO is below the zero line. This entails two consecutive green bar (the second bar is higher than the first) followed by a red bar.
The main parameters concern the appearance of the histogram, the user can select the desired color and line thickness. The following colors are used by default:
Green - to indicate an increase in price, that is, an increase in acceleration;
Red - to indicate a decrease in price, that is, an increase in deceleration.
The indicator looks as follows on the chart:
