The Awesome Oscillator (AO) is one of the most popular technical indicators used in the forex market. It is a momentum oscillator that is used to measure the momentum of an asset in the market. The indicator was introduced by Bill Williams, a renowned trader who developed a unique trading approach known as the Chaos Theory. In this article, we will explain how to use the Awesome Oscillator in forex.
What is the Awesome Oscillator?
The Awesome Oscillator is a histogram-based technical indicator that is used to measure the momentum of an asset. It consists of two moving averages, which are calculated using the median price of an asset. The first moving average is calculated using the median price of the last five bars, while the second moving average is calculated using the median price of the last 34 bars.
The difference between these two moving averages is then plotted as a histogram. The histogram can either be positive or negative, depending on the direction of the momentum. If the histogram is positive, it means that the momentum is bullish, while if it is negative, it means that the momentum is bearish.
How to Use the Awesome Oscillator in Forex?
The Awesome Oscillator can be used in different ways to trade the forex market. Here are some of the ways you can use the indicator to generate trading signals:
1. Momentum Trading
One of the most popular ways to use the Awesome Oscillator is to trade the momentum of an asset. When the histogram is positive, it means that the momentum is bullish, and when it is negative, it means that the momentum is bearish.
To trade the momentum, you can look for bullish or bearish divergences between the Awesome Oscillator and the price of the asset. A bullish divergence occurs when the price of the asset is making lower lows, while the Awesome Oscillator is making higher lows. This is a sign that the momentum is shifting from bearish to bullish, and it could be a good time to enter a long position.
On the other hand, a bearish divergence occurs when the price of the asset is making higher highs, while the Awesome Oscillator is making lower highs. This is a sign that the momentum is shifting from bullish to bearish, and it could be a good time to enter a short position.
2. Trend Trading
Another way to use the Awesome Oscillator is to trade the trend of an asset. When the histogram is positive, it means that the trend is bullish, and when it is negative, it means that the trend is bearish.
To trade the trend, you can look for crossovers between the Awesome Oscillator and the zero line. When the Awesome Oscillator crosses above the zero line, it means that the trend is shifting from bearish to bullish, and it could be a good time to enter a long position. On the other hand, when the Awesome Oscillator crosses below the zero line, it means that the trend is shifting from bullish to bearish, and it could be a good time to enter a short position.
3. Divergence Trading
Finally, you can use the Awesome Oscillator to trade divergences between the indicator and the price of the asset. A bullish divergence occurs when the price of the asset is making lower lows, while the Awesome Oscillator is making higher lows. This is a sign that the momentum is shifting from bearish to bullish, and it could be a good time to enter a long position. On the other hand, a bearish divergence occurs when the price of the asset is making higher highs, while the Awesome Oscillator is making lower highs. This is a sign that the momentum is shifting from bullish to bearish, and it could be a good time to enter a short position.
Conclusion
The Awesome Oscillator is a powerful technical indicator that can be used to trade the forex market. It is a momentum oscillator that is used to measure the momentum of an asset in the market. The indicator can be used in different ways to generate trading signals, including momentum trading, trend trading, and divergence trading.
