Awesome Oscillator. Let Us Check its Effectiveness

Let’s talk about the Bill Williams Awesome Oscillator in the article.

The author in his book titled “New Trading Dimension” writes the following about his creation: “It is, without doubts, the best momentum indicator available in the stock and commodity markets”. “If you really know how to use this indicator, it should be worth at least seven figures to you in the next few years.”

Let us check the effectiveness of Awesome Oscillator’s signals using historical data of various financial instruments. 

An indicator of Awesome Oscillator (АО) is used to measure the power of price movement and it is based on two simple moving averages (SMA). On charts, it is drawn in form of the colorful histogram which is separated by the zero line. Bars of the histogram can be higher or lower the zero value and can change the color depending on the direction of changes in parameters:

AO is the difference between two simple moving averages (SMA) with the periods of 5 (rapid) and 34 (slow):

AO = SMA (5) – SMA (34)

In the calculation of the rapid and slow moving averages, the median price is used  (the arithmetic average from the maximum and minimum values of the candlestick):

MEDIAN PRICE = (HIGH + LOW) / 2

Periods of moving averages are fixed (5 and 34) and do not involve settings.

The Awesome oscillator shows changes in the dynamics of the price movement. The more intensive the price moves, the larger the gap is between the rapid and the slow moving averages, and the longer the columns of the oscillator’s histogram. 

Along with the indicator, Bill Williams suggested variants of its application. It is three patterns which can be shown by the oscillator’s bar histogram:

1. A Saucer
2. The Zero Line Cross
3. Two Peaks

A Saucer forms when three consequent columns appear on the histogram, the first two are the same color and the third one is another color. Thus, the second (middle) column is shorter the two last columns. We seek buy signals in the positive area of the histogram and we seek sell signals in the negative area. 

The Zero Line Cross is interpreted by the following way:

• When the indicator’s histogram moves from the bottom part to the top part (crosses the zero value), this means that the rapid SMA crossed the slow SMA bottom-up. This is a buy signal.
• A reverse cross is a sell signal. When the indicator’s histogram moves from the top part to the bottom part.

Two Peaks represents the two last extrema on the indicator’s chart.

A buy signal is two consequent minimums following each other and the second minimum is slightly above the first one and the gap between them is not in the area of positive values of the histogram

A sell signal is given by the two consecutive maximums with the second maximum slightly below the first one and the gap between them is not in the negative histogram area. 

Let us test the «Saucer», «Zero Line Cross» and «Two Peaks» signals against a large amount of historical data of various financial instruments and on the basis of two timeframes.

Now, we specify conditions of closing a trading position.

Closing a position:

The lifetime of the position is set at 5 or 10 (in candlesticks) in all cases. 

Analysis of the Results

First, we will estimate the results based on the sample size.

The H1 timeframe (1 hour):

The D1 timeframe (1 day):

The total number of candlesticks and events:

Next, we discover the share of events in % in the total number of initial candlesticks on the basis of timeframes:

The H1 timeframe (1 hour):

The D1 timeframe (1 day):

The “Saucer” signal more often appears on charts, and the “Two Peaks” signal appears rarely.

Now, we turn to the results of performance of trading signals obtained through the formed «Saucers», «Zero Lines Crosses», and «Two Peaks».

We will assess the results with the two following criteria:

• Momentum (m) reflects the average change in quotes of financial instruments at the moment of fixating a position, in %. A positive value of the momentum indicates profitability of the signal performance, a negative value indicates a loss.
• SPP, the share of profitable positions, %.

Let us see the results based on holding positions and timeframes.

Let’s take the following notations:

«H1 / 5», fixing a position at the 5^th candlestick over the 1-hour timeframe;

«H1 / 10», fixing a position at the 10^th candlestick over the 1-hour timeframe;

«D1 / 5», fixing a position at the 5^th candlestick over the 1-day timeframe;

«D1 / 10», fixing a position at the 10^th candlestick over the 1-day timeframe;

Saucer

The Number of events, the Momentum in %, and the Share of profitable positions in % on a term-to-term basis of the hold of positions, timeframes, and market segments

Zero Line Cross

The Number of events, the Momentum in %, and the Share of profitable positions in % on a term-to-term basis of the hold of positions, timeframes, and market segments

Two Peaks

The Number of events, the Momentum in %, and the Share of profitable positions in % on a term-to-term basis of the hold of positions, timeframes, and market segments

Let us summarize the Results using the following diagrams:

Detailed results are shown in the Appendix:

XLSX (0.06 MB)Application to the article 'Awesome Oscillator. Let's check its effectiveness'.xlsx