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Awesome Oscillator
Awesome Oscillator shows the difference in between the 5 SMA and 34 SMA.
If to be precise, 5 SMA of midpoints is subtracted from 34 SMA of midpoints which
allows to see the market momentum.
Let's take a look at the Awesome Oscillator in action by simply comparing it to 5 and 34
SMA on the chart.
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As you can see, the AO mirrors the up and down moves of the 5 SMA in relation to 34
SMA.
That's our momentum Up and momentum Down periods. When two SMAs finally cross,
the AO also crosses its zero line.
Does AO gives any additional information besides following the market & showing
increase/decrease in momentum which we can be seen with naked eye? - we'd say No.
Is AO fast enough to send signals about the market changes and aid us with entries as
well as exits? It's No again. Awesome Oscillator is slow and usually late with signals.
General rules:
Buy signal:
The signal to Buy comes when AO histogram forms a series of 3 bars, where:
bar 1 - is red.
bar 2 - is red. (Defaults: bar 2 will always be lower than bar 1. No need to worry about
the height comparison).
bar 3 is green. (Defaults: bar 3 will always be higher than bar 2. No need to monitor the
height again).
Place a pending Buy order above the candlestick which corresponds to the first green
bar on the AO histogram.
Sell signal:
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candle 2 is green.
candle 3 is red.
Place a pending Sell order below the candlestick which corresponds to the first red bar
on the AO histogram.
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Those two methods aren't used very often, but still have the right to exist and be
studied.
(If you like to learn more about divergence, study examples of trading MACD
divergence. MACD is the most common indicator for studying market divergence).
In the highlighted examples below when the AC changed color from red to green and
vice verse - this was a signal to exit:
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