The Awesome Oscillator: Awesome or Awful?

The Awesome Oscillator measures the difference between a 5 simple moving average and a 34 simple moving average, which basically allows one to visualise the strength of a market trend.

It is represented by a two-color histogram (usually red and green), and performs a similar function to the MACD.

However, there are two crucial differences between this indicator and the MACD, which is something I'll explain in this article.

So read on.


Awesome Oscillator formula

Although this indicator is termed as an “oscillator”, it’s mathematical formula is not bounded by maximum or minimum values. This means that in theory, can be situations in which the Awesome oscillator (AO) stays above (or below) the zero line for long periods of time.

Here’s the formula:

AO = [(5 SMA high - 5 SMA low) / 2] - [(34 SMA high - 34 SMA low) / 2]

Awesome Oscillator interpretation

On the chart, the indicator prints a green bar when its current value is higher than the previous value. Likewise, a red bar is printed when the current value is lower than the previous value.

awesome oscillator bars

The way to interpret this indicator is relatively straightforward:

The higher the oscillator moves above zero, the stronger the uptrend is.

The lower it moves below zero, the stronger the downtrend is.

awesome oscillator strength

Trade signal: Zero line cross

When the Awesome oscillator crosses below the zero line, it means that the 5 SMA has crossed below the 34 SMA, and vice versa when the Awesome oscillator crosses above the zero line.

Thus, if, to you, the crossing of the two moving averages constitutes a trend change, then you may want to trade whenever the awesome oscillator crosses the zero line.

awesome oscillator cross

Trade signal: Indicator divergence

Another way to trade with this indicator is with a bullish or bearish divergence. It’s same way you would trade a divergence with other oscillator indicators such as the DeMarker indicator.

A bearish divergence is in play when the Awesome oscillator forms a lower peak above the zero line, while the market price forms a higher peak:

awesome oscillator bearish divergence

Conversely, a bullish divergence is in play when the indicator forms a higher trough below the zero line, while the market price forms a lower trough:

awesome oscillator bullish divergence

Keep in mind that the Awesome oscillator is a heavily lagging indicator, which means that by the time you get a clear trade signal, the market is likely to have already moved significantly.

You can find more AO entry signals here.

Awesome oscillator vs MACD​

​As mentioned earlier, this indicator operates similarly to the MACD. However, there are two crucial differences you need to be aware of.

​Firstly, the AO is based on simple moving averages, while the MACD is based on exponential moving averages.

This means that the AO will react slower to recent price action than the MACD.

Secondly, the moving averages of the AO is based on the median price, while the moving averages of the MACD are based on the closing price.

​Taking these two factors into account, we can conclude that the Awesome indicator will be smoother, more stable, and react slower than the MACD.

awesome oscillator vs macd

In the chart above, the vertical red lines indicate the points where the moving averages of the MACD crossed. The vertical blue lines indicate the points where the moving averages of the AO crossed.

​As you can see, the MACD tends to throw out earlier, and more signals than the AO.

Thus, if you find the MACD too unreliable, you might want to start using the Awesome oscillator.​

Trend trading

As far as I can tell, the best way to use the Awesome indicator is with trend trading.

Once a price trend has been identified, the AO can be used to buy on pullbacks in an uptrend, or to sell on rallies in a downtrend.

In the example below, the vertical blue lines indicate the points where the indicator crosses above the zero line (indicating a buy) in an uptrend, while the vertical red lines indicate the points where the indicator crosses below the zero line (indicating a sell) in a downtrend.

trend trading awesome oscillator

So… Awesome or Awful?

The way the indicator is calculated renders it effective only in strongly trending markets.

In my view, this is a big drawdown since many other indicators (like the MACD) can be tweaked to offer the same features as the Awesome oscillator.​ There really isn't anything special about the AO that gives it an advantage over other similar trend indicators.

​So unfortunately, despite the cool-sounding name of this indicator, I have to label it 'awful'.

Am I wrong? Let me know what you think!

Let me know your opinion in the comments section below, and if this article has been helpful, please share it!

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