The aptly named Awesome Oscillator is an amazing technical analysis indicator designed to measure the underlying market momentum as well as to confirm trends and anticipate reversals.

The Awesome Oscillator was developed by the legendary chartist Bill Williams, who described it as the ‘best momentum indicator’ that is ‘as simple as it is elegant’.

The Awesome Oscillator is based on a combination of moving averages, but its ‘awesomeness’ is illustrated by the clear and straightforward trading signals that it generates.

As its name suggests, the Awesome Oscillator belongs to the broader group of oscillators, which consists of indicators such as the RSI, Stochastics and MACD. But while most oscillators usually swing between defined values such as ‘0 to 100’ or ‘-100 to +100’, the Awesome Oscillator is unbounded.

Other popular Bill Williams’ indicators include the Accelerator Oscillator, Fractals, Gator Oscillator, Alligator and the Market Facilitation Index.

Calculating the Awesome Indicator

By definition, the Awesome Oscillator is a 34-period simple moving average subtracted from a 5-period simple moving average. The awesome part may well be that simple moving averages are plotted using median prices of candlesticks rather than the typical closing price.

This essentially means that the 34-period simple moving average is a smoothed line of the mid-points of the last 34 candlestick bars, whereas the 5-period simple moving average is a smoothed line of the mid-points of the last 5 candlestick bars.

The formula to calculate the Awesome Oscillator is as follows:

Awesome Oscillator = SMA (MEDIAN PRICE, 5)-SMA (MEDIAN PRICE, 34)

Where:

SMA = simple moving average

Median Price = (HIGH+LOW)/2

The Awesome Oscillator (AO) is then plotted as a histogram that swings above and below the 0 centreline, and it prints red and green bars. Like candlesticks, green bars indicate that the AO is higher than the previous bar, while a red bar shows that the AO is lower than the previous bar.

Reading the Awesome Oscillator

Because it plots the difference between a fast-moving and slow-moving average, the Awesome Oscillator prints both negative and positive values. Basically, a positive reading implies that the fast-moving average (5-period) is greater than the slow-moving average (34-period); likewise, a negative reading implies that the slow-moving average is greater than the fast-moving average.

Thus, the basic interpretation of the Awesome Oscillator is that a reading above zero confirms an uptrend is in place, whereas a reading below zero confirms a downtrend is intact.

The bar colours of the Awesome Indicator are based on indicator values within a certain period. Thus, it is possible to have red bars above zero, and green bars below zero. A rising green histogram indicates that the Awesome Oscillator value is higher than the previous bar, whereas a falling histogram indicates that Awesome Oscillator value is lower than the previous bar.

Trading Awesome Oscillator Signals

Here are the best signals to trade with when using the Awesome Oscillator:

  1. Zero Line Crosses

This is a straightforward strategy because of the computation of the Awesome Oscillator. A cross above zero confirms that an uptrend has formed, and traders should seek opportunities to place only buy orders in the market; whereas a cross below zero confirms that a downtrend has formed in the market and traders should only seek to place sell orders.

  1. Saucer Strategy

The Awesome Oscillator serves ‘Saucer’ buy and sell opportunities using 3 histogram bars as follows:

Buy Signal Conditions

  • The Awesome Oscillator is above zero
  • Two consecutive histogram bars are red (falling)
  • The third histogram bar is green and higher than the second one
  • Place a buy order on the open of the fourth bar

Sell Signal Conditions

  • The Awesome Oscillator is below zero
  • Two consecutive histogram bars are green (rising)
  • The third histogram bar is red and lower than the second one
  • Place a sell order on the open of the fourth bar

The saucer strategy helps in picking out optimal trade entry points in a trending market and is designed to ensure traders capture trading opportunities when there is a quick change in the price momentum.

  1. Twin Peaks

This strategy enables traders to pick out high probability contrarian opportunities in the market. The strategy requires that the Awesome Oscillator forms two peaks and a trough, all on the same side of the zero-line.

A bullish twin peak will form below the zero-line, with the second peak higher than the first one and followed by a green bar. On the flip side, a bearish twin peak forms above the zero-line, with the second peak being lower than the first one and followed by a red bar. A bullish twin peak is a signal to place a buy order, while a bearish twin peak is a signal to place a sell order.

Combining the Awesome Oscillator with Other Indicators

The Awesome Oscillator (AO) is a versatile tool that helps traders gauge market momentum and spot potential reversals. However, relying solely on the AO can sometimes lead to missed opportunities or false signals. Combining it with other indicators can enhance its accuracy and provide a clearer picture of market conditions. Let’s explore some practical setups using the AO with complementary tools.

Using AO with Moving Average Convergence Divergence (MACD)

The MACD measures the relationship between two moving averages, making it excellent for confirming momentum changes identified by the AO. When used together, these tools help traders validate potential entries and exits more confidently.

Example Setup:

  • Scenario: You are monitoring the EUR/USD currency pair on a 4-hour chart. The AO shows a bullish crossover (green bar above the zero line), suggesting upward momentum.
  • Confirmation with MACD: Check the MACD. If the MACD line crosses above the signal line at the same time, this double confirmation increases confidence in a bullish trade.
  • Entry Point: Enter a long trade immediately after the confirmation.
  • Exit Point: Exit when the AO bars turn red or the MACD lines cross back down, indicating a weakening trend.

This approach minimises false entries by requiring both indicators to align.

Integrating AO with the Accelerator Oscillator

The Accelerator Oscillator (AC) complements the AO by focusing on the speed of market momentum. This combination can help refine the timing of entries and exits.

Example Setup:

  • Scenario: You are trading gold on a daily chart, and the AO signals a potential bearish reversal (red bar below the zero line).
  • Confirmation with AC: Look for the AC to show two consecutive red bars. This confirms that bearish momentum is accelerating.
  • Entry Point: Enter a short trade after the AC confirmation.
  • Exit Point: Close the trade if the AO shows green bars again, signalling a potential trend reversal.

By using both AO and AC, traders can avoid entering trades too early and focus on stronger, more reliable setups.

Using AO with Bollinger Bands

Bollinger Bands are ideal for identifying overbought or oversold conditions, making them an excellent companion to the AO. Together, they help traders navigate volatile or ranging markets where momentum signals can be less reliable.

Example Setup:

  • Scenario: You are analysing Bitcoin on a 1-hour chart. The price is nearing the lower Bollinger Band, suggesting oversold conditions.
  • AO Signal: At the same time, the AO shows a bullish crossover (green bar above the zero line), signalling potential upward momentum.
  • Entry Point: Enter a long position when the price closes above the lower Bollinger Band.
  • Exit Point: Close the trade when the price touches or approaches the upper Bollinger Band, or if the AO bars turn red.

This setup is particularly well suited for short-term trades in ranging markets.

Advantages and Limitations

The Awesome Oscillator (AO) is a powerful tool, but like any technical indicator, it comes with strengths and weaknesses. Understanding these can help traders use the AO more effectively and avoid common pitfalls.

Advantages

Helps Identify Market Momentum and Potential Reversals
The AO excels at highlighting momentum shifts, making it a valuable tool for spotting trend reversals early.

  • Example: During a strong uptrend in the S&P 500, the AO shows diminishing green bars. This signals a weakening momentum, helping traders prepare for a potential correction.

Applicable Across Various Timeframes and Markets
The AO works on multiple timeframes, from intraday charts to long-term analysis. The indicator is also effective across different asset classes like forex, stocks, and cryptocurrencies.

  • Example: A day trader might use the AO on a 15-minute chart to time intraday entries, while a long-term investor could rely on it for weekly trend analysis.

Limitations

May Produce False Signals in Ranging Markets
In sideways or choppy markets, the AO often generates misleading signals, as momentum shifts can lack follow-through.

  • Example: On a flat EUR/GBP chart, the AO oscillates around the zero line, causing multiple false entries.

Solution: Combine the AO with tools like Bollinger Bands or support/resistance levels to filter out noise.

Should Not Be Used in Isolation
The AO’s signals are most effective when confirmed by other indicators or analysis methods. Using it alone increases the risk of misinterpreting trends.

  • Example: A bullish AO signal might occur during a broader downtrend, leading to losses if not backed by other signals from trendlines or moving averages.

Practical Tips for Traders

To make the most of the Awesome Oscillator (AO), traders should adopt best practices that enhance its effectiveness and reduce risks. Here are some actionable tips for using the AO in your trading strategy:

  1. Importance of Backtesting Strategies

Before using AO-based strategies in live trading, it’s crucial to test them against historical data. Backtesting allows traders to evaluate the reliability of their setups and refine their approaches.

  • Example: Use a demo account or trading software to simulate AO-based trades on past market data. Test combinations like AO with MACD or Bollinger Bands to identify the most effective setups.
  1. Risk Management Practices

Effective risk management is essential when trading with any indicator, including the AO.

  • Set Stop-Loss Orders: Always use stop-loss orders to limit potential losses. For example, set a stop-loss just below a recent support level when entering a bullish trade based on AO signals.
  • Avoid Over-Leveraging: Use a reasonable position size to ensure that a single loss doesn’t significantly impact your account balance.
  • Example Strategy: For a trade based on AO and AC confirmation, risk no more than 1-2% of your account per trade.
  1. Continuous Learning and Staying Updated

Markets evolve, and so should your trading strategies. Stay informed about market conditions and refine your use of the AO accordingly.

  • Learn from Mistakes: Review trades where AO signals didn’t work as expected. Analyse what went wrong and adapt your approach.
  • Stay Informed: Economic events, news and trends can influence market momentum. For example, a sudden policy announcement might invalidate AO signals temporarily.

Conclusion

Awesome Oscillator’s versatility across various timeframes and markets makes it a favourite among traders. However, the AO is most effective when integrated into a broader trading strategy, combining it with complementary indicators like the MACD, Bollinger Bands, or the Accelerator Oscillator.

To maximise its potential, traders should practice disciplined risk management, backtest their strategies thoroughly, and remain adaptable to changing market conditions. While no indicator guarantees success, the Awesome Oscillator can significantly enhance decision-making when used correctly.

Trading with Awesome Oscillator at AvaTrade

The Awesome Oscillator is available on the  AvaTrade platforms alongside other popular Bill Williams indicators. Here is why you should trade with this ‘awesome indicator’ at AvaTrade:

Main Awesome Oscillator Indicator FAQ

  • What is the Awesome Oscillator indicator?
    The Awesome Oscillator is used to measure market momentum. It is calculated using the difference between the 34 and 5 period simple moving average. Unlike most indicators the simple moving averages used are not calculated from closing or opening prices, but rather from the midpoint of the bar. The Awesome Oscillator is most often used as a confirming indicator or to anticipate potential reversals.

  • Is the Awesome Oscillator the best oscillator indicator?
    By itself the Awesome Oscillator doesn’t give traders enough information to be completely reliable. Instead it should be paired with other indicators to give a more reliable signal. The best pairing is to combine the Awesome Oscillator with the Stochastic Oscillator. The two are complimentary and will confirm changes in momentum. Other good combinations are with the Relative Strength Index (RSI) or with the Moving Average Convergence/Divergence (MACD). These combinations help to make the Awesome Oscillator the best oscillator indicator.

  • What is an Awesome Oscillator trading strategy?
    One of the more reliable Awesome Oscillator trading strategies is known as “Twin Peaks.” It got this name because it looks for a double top or a double bottom in the oscillator. A double top above the zero line followed by a red zone is bearish, while a double bottom under the zero line followed by a green zone is bullish. This strategy can also be improved by using a trend line. In the bearish scenario a trendline is drawn downward from the tops and when the oscillator crosses back above this trendline a buy signal is triggered.

Register Now Or Try Free Demo

** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.