AO (Awesome Oscillator)

AO (Awesome Oscillator) is one of five Bill Williams' indicators included in the list of standard indicators of Marketscope (the other four are ALLIGATOR (Alligator), GATOR (Gator), AC (Acceleration/Deceleration), and FRACTAL (Fractal)). It was developed in 1995 and presented in Bill Williams' book New Trading Dimensions.

AO is intended to provide information about the market momentum. In very general words, momentum can be explained as the quantity of motion of a moving body. Bill Williams believes that the market prices follow the momentum, and its monitoring helps foreseeing the price changes.
For this purpose, AO measures the immediate momentum of the last five periods and compares it to the momentum of the last 35 periods. The values are calculated automatically as the difference between the fast and slow simple moving averages of a period's median prices (the mathematical formulas are provided later in the article).

On a chart, the values are presented as a histogram. Its bars are above the zero line when their values are positive and below the zero line when the values are negative. By default, a bar is green if its value is greater than the value of the immediately preceding one and red if its value is smaller than the value of the immediately preceding bar. The bars oscillate around the zero line, thus, indicating different states of the market momentum. The longer the bars are, the greater the market momentum is, and vice versa.
When the oscillator's bars stay close to the zero line changing their colors between green and red, the market is assumed to be moving sideways. Steady growth of the bars in one direction away from the zero line signals that the market momentum is increasing. When the bars are above the zero line, the prices are expected to move up (uptrend). When the bars are below the zero line, the prices are expected to move down (downtrend).
Note that AO is always drawn in an additional area below the market price chart.

On the following picture, you can see an example of the AO oscillator.



According to Bill Williams, the AO, ALLIGATOR, AC, and FRACTAL indicators form a complex trading system and work best when they are used in conjunction with each other.

Please remember that as its Data Source the indicator uses the historical data and provides the information that belongs to the past. A trader can only suppose that the market situation will continue to develop in the same way for some time in the future and try to use the supposition appropriately.

To apply an AO to a chart, a trader needs to follow the procedure common to all Marketscope indicators. For more information, see the Add Indicator article.

During the procedure, a trader can customize the oscillator by specifying its parameters in the Properties dialog box. For more information, see the Change Indicator Properties article.

The parameters fall into two groups:

• Calculation - the parameters needed to calculate an indicator's prices.
• Style and Appearance - the parameters needed to specify the way an indicator appears on a chart.

AO has the following Calculation parameters:

• Fast MA periods - the parameter allows specifying the number of periods, over which the shorter-period moving average indicator is to be calculated. The possible parameter's values are from 2 through 10,000. The default value is 5. The smaller the number is, the more sensitive the oscillator is, and vice versa. The most popular is the default value - 5.
• Slow MA periods - the parameter allows specifying the number of periods, over which the longer-period moving average indicator is to be calculated. The possible parameter's values are from 2 through 10,000. The default value is 35. The smaller the number is, the more sensitive the oscillator is, and vice versa. The most popular is the default value - 35.

The parameters are available on the Parameters tab of the AO Properties dialog box under the Calculation heading.

The AO oscillator has the following Style parameters:

• Higher Bars color - the parameter allows specifying the color of the histogram bar, the value of which is greater than the value of the immediately preceding one. For more information, see the Marketscope Indicators article. By default, the bar is green.
• Lower Bars color - the parameter allows specifying the color of the histogram bar, the value of which is smaller than the value of the immediately preceding one. For more information, see the Marketscope Indicators article. By default, the bar is red.

The parameters are available on the Parameters tab of the AO Properties dialog box under the Style heading.

When an AO oscillator is drawn on a chart, a trader can analyze its information and try to interpret it correctly.
AO produces the following trading signals:

• Saucer signals - the signals are generated when the histogram obtains a configuration of a saucer while changing its direction from downward to upward, or vice versa. A cluster of minimum three bars is required to form a saucer (though, there can be any number of bars between the first and last ones of the cluster).
  Note that only the latest signal can be considered for taking trading decisions.
  
  The signals are further subdivided into:

• Saucer buy signals - the signals are generated only when the histogram is above the zero line. The first bar (from left to right) can be of any color (green or red) but must be taller than the second one; the second bar is red and must be shorter than the third one; the third bar (green) is the Saucer buy signal bar. Consider opening of Buy positions and closing of opened Sell ones.
• Saucer sell signals - the signals are generated only when the histogram is below the zero line. The first bar (from left to right) can be of any color (green or red) but must be taller than the second one; the second bar is green and must be shorter than the third one; the third bar (red) is the Saucer sell signal bar. Consider opening of Sell positions and closing of opened Buy ones.

On the following picture, you can see examples of the Saucer signals.

• Cross signals - the signals are generated when the histogram crosses the zero line from above or below. Only two bars are needed to form a Cross signal: one on either side of the zero line.
  Note that only the latest signal can be considered for taking trading decisions.
  
  The signals are further subdivided into:

• Cross buy signals - the signals are generated when the values of the histogram bars change from negative to positive. Consider opening of Buy positions and closing of opened Sell ones.
• Cross sell signal - the signals are generated when the values of the histogram bars change from positive to negative. Consider opening of Sell positions and closing of opened Buy ones.

On the following picture, you can see examples of the Cross signals.

• Twin Peaks signals - the signals are generated when the histogram forms two tops of different heights and both of them are on one and the same side of the zero line (the histogram's bars must not cross the zero line in between the tops).
  Note that only the latest signal can be considered for taking trading decisions.
  
  The signals are further subdivided into:

• Twin Peaks buy signals - the signals are generated only when the histogram is below the zero line. The latest top of the histogram must be shorter (closer to the zero line) than the preceding one. The first green bar of the latest top is the Twin Peaks buy signal. Consider opening of Buy positions and closing of opened Sell ones.
• Twin Peaks sell signals - the signals are generated only when the histogram is above the zero line. The latest top of the histogram must be shorter (closer to the zero line) than the preceding one. The first red bar of the latest top is the Twin Peaks sell signal. Consider opening of Sell positions and closing of opened Buy ones.

On the following picture, you can see examples of the Twin Peaks signals.



The AO oscillator's values are calculated automatically using the following formula:

AO = Fast MVA - Slow MVA

where:
AO - is the AO value of the period being calculated.
Fast MVA - is the median price of the period being calculated that is smoothed by a shorter-period MVA (the number of periods is specified by the Fast MA periods parameter).
Slow MVA - is the median price of the period being calculated that is smoothed by a longer-period MVA (the number of periods is specified by the Slow MA periods parameter).