Last Updated on August 25, 2022 by Oddmund Groette
Williams stated in his book, “It is, without doubt, the best momentum indicator available in the stock and commodity markets. It is as simple as it is elegant.” That’s a bold statement. What is in this indicator?
The Bill Williams Awesome oscillator is an indicator that traders use to measure momentum in a market with the aim of detecting potential trend direction or trend reversals. It is basically a 34-bar simple moving average subtracted from a 5-bar simple moving average. Like all indicators, it is typically used as part of a larger trading system to formulate a strategy.
Now, let’s take a look at the indicator.
What is Bill Williams Awesome oscillator?
The Bill Williams Awesome Oscillator is a technical analysis indicator created by American trader Bill Williams as a tool to determine whether bullish or bearish forces dominate the market. Traders use it to measure momentum in a market with the aim of detecting potential trend direction or trend reversals. The indicator measures momentum by comparing recent market movements to historic market movements. It does this by combining a shorter-timeframe and longer-timeframe simple moving averages; in other words, it considers the recent momentum in comparison with a higher timeframe momentum. Like all indicators, it is typically used as part of a larger trading system.
The Awesome Oscillator is plotted in its own window at the bottom of the chart and has a zero line much like many other oscillators. It uses the 34 simple moving average and the 5 simple moving average in its calculation; however, the moving averages that are used to calculate the indicator reading aren’t the conventional moving averages that people will use as they don’t measure the close of the candlestick, but the midpoint of the candlestick range. The indicator measures the difference between the two moving averages and plots them in a histogram.
It has a zero line in the center, and on either side of it, the price movements are plotted according to a comparison of two different moving averages. As an oscillator, it will fluctuate above and below the zero line which is considered neutral. When the histogram is above the zero line, it indicates that the shorter moving average is trending higher than the longer one, and when the histogram is below the zero line, the short-term moving average is lower than the longer one. In its standard form, the histogram will print out in red or green bars — the bar turns green when its value is higher than the one before it and turns red if the value is lower than the one before it.
The indicator is generally used to confirm a short-term trend but can also be used to anticipate a potential reversal of the trend.
How to calculate the Awesome indicator
The awesome oscillator is calculated by subtracting a 34-period simple moving average (SMA) from a 5-period SMA. But the SMAs use the mid-point of the candlesticks (median prices) instead of the close prices. It can be calculated for any timeframe (trading session) — minutes, hourly, daily, or even monthly.
Most trading platforms have a built-in Awesome indicator and will plot it on the chart when you click on it from the indicator section of the platform. However, for learning purposes, here is the formula for calculating the Awesome Oscillator:
Awesome Oscillator = 5-period SMA (median prices) — 34-period SMA (median prices)
Where the median price of any price bar is given as:
Median price = (Highest Price + Lowest Price)/2
Bill Williams prefers to use the median prices instead of the closing prices because it allows the trader to glean into the activity of the day. For instance, if there was a ton of volatility, the mid-point will be larger. But if the closing prices were used and there was a major reversal, the trader would have no way of capturing the volatility that occurred during the day.
Interpreting the Awesome Oscillator
The indicator has a zero line, which is considered neutral, at the center of the indicator box. As an oscillator, it fluctuates above and below that zero line, as price movements are plotted according to a comparison of two different moving averages.
You can think of this much like a moving average server system: when the histogram is above the zero line, it indicates that the shorter moving average is trending higher than the longer one, and when the histogram is below the zero line, the short-term moving average is lower than the longer one, showing a downtrend.
In other words, if the awesome oscillator is above the zero line, the market is currently bullish but momentum could shift towards being bearish. Conversely, if the awesome oscillator is below the zero line, then the market is currently bearish; however, momentum could shift towards being bullish.
How to use Bill Williams Awesome oscillator?
Traders can use the information supplied by the awesome oscillator to forecast market momentum and whether the prevailing trend will continue or reverse. However, don’t use the Awesome indicator alone as there will be many false signals; you must combine it with other trading tools to improve the odds of successful trades. With this in mind, here are the three ways to use the indicator:
Bullish or bearish zero line crossover
A bullish zero-line crossover is when the awesome oscillator goes from below to above the zero line. Be sure the trend is already confirmed to be in an uptrend before using the bullish crossover signal:
A bearish crossover is when the indicator goes from above to below the zero line. Use the signal only if the market has been confirmed to be in a downtrend
A bullish twin peak is when there are two peaks in momentum below the zero line. The second peak must be smaller than the first, and the green bar closer to the zero line. Trade only in a confirmed uptrend.
A bearish twin peak is when there are two peaks in momentum above the zero line. The second peak must be smaller than the first, and the red bar closer to the zero line. Trade only in a confirmed downtrend.
A bullish saucer can be identified when the awesome oscillator is above the zero line and there are two or more consecutive declining (red) histogram bars which are followed by a rising (green) bar. Trade this only in a confirmed uptrend
A bearish saucer can be identified when the awesome oscillator is below the zero line and there are two consecutive ascending (green) histogram bars which are followed by a lower (red) bar. Trade only in a confirmed downtrend.
Bill Williams Awesome Oscillator trading strategy (backtest and example)
A backtest of Bill Williams Awesome Oscillator trading strategy is coming soon.