Bill Williams Awesome Oscillator Strategy (Backtest + Statistics)
What is in Bill Williams Awesome indicator strategy? 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.
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. At the end of the article, we make a backtest of Bill Williams Awesome 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. He also invented the Market Facilitation Index (MFI).
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.
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Backtested trading strategies
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.
How to interpret 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, the market is currently bearish; however, momentum could shift towards 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. Bill Williams recommends to use the signal only if the market has been confirmed to be in a downtrend.
Twin peaks
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.
Saucer strategy
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)
Let’s backtest a few Bill Williams Awesome indicator with specific trading rules and settings.
We start with backtesting the crossover strategy:
Bill Williams Awesome oscillator indicator backtest 1
We make the following trading rules:
- When the short moving average crosses above the long moving average, we go long.
- We sell when it crosses below the zero line.
The equity curve of this backtest looks like this on the gold price (GLD):
The equity curve shows that this is not a viable trading strategy. We tried the same strategy on other asset classes (S&P 500, Treasury bonds), but with the same conclusion.
Does it get any better if we flip the strategy:
Bill Williams Awesome oscilllator indicator backtest 2
This is the equity when we flip the strategy and are invested when the short-term moving average is below the long-term average (and we are not invested when the opposite happens):
Again, the strategy has not much to show for it. We also backtested other ETFs, but to no avail.
Bill Williams Awesome oscillator indicator backtest 3
Let’s make a third and last backtest.
This time we make a twist to the strategy, and we make the following trading rules (again, we are testing on the gold price – GLD):
- When the 5-day RSI indicator of Bill Williams Awesome indicator crosses above 60, we go long at the close.
- When the 5-day RSI crosses below 50, we sell at the close.
The strategy improves, but still a long from being tradable. The average gain is 0.57%.
Can the strategy be improved?
Yes, we added a simple trend filter to the strategy, and it improved a lot:
If you’d like to have the logic in plain English or in Amibroker, you need to order the code (and you’ll additionally get the code for over 180 other good trading strategies). Please press this link:
Bill Williams Awesome oscillator strategy – ending remarks
Backtests reveal that the indicator doesn’t work very well on its own, but improves a lot if you add a second variable.
FAQ:
How does the Awesome Oscillator calculate momentum?
The Awesome Oscillator calculates momentum by comparing recent market movements to historic movements. It uses a 34-period and a 5-period simple moving average based on the median prices of candlesticks, plotted in a histogram format to indicate the difference between the two averages.
Where is the Awesome Oscillator plotted on the chart?
The Awesome Oscillator is plotted in its own window at the bottom of the chart. The histogram displays the difference between the 34-period and 5-period simple moving averages. The zero line on the histogram is considered neutral, with movements above indicating bullish momentum and below indicating bearish momentum.
How can traders interpret the Awesome Oscillator?
Traders interpret the Awesome Oscillator by observing its fluctuations above and below the zero line. When above, it indicates bullish momentum, and when below, it suggests bearish momentum. Crossovers, twin peaks, and saucer patterns are also used to anticipate trend reversals or continuations.