Pretty Good Oscillator (PGO) – Strategy, Rules, Settings, Returns

Among the tools available for analyzing the markets, oscillators are some of the most interesting for tracking the momentum of individual price swings — one that seems to do a damn good job is the Pretty Good Oscillator (PGO). What do you know about the PGO?

The Pretty Good Oscillator (PGO) is a technical indicator that measures the difference between the current price and its moving average of a chosen period and expresses it in terms of the number of average true ranges of the same period. Developed by Mark Johnson, the PGO is a momentum oscillator that gauges how fast the price is rising above or falling below its moving average, expressing it in terms of ATR numbers.

In this post, we will take a look at most of the questions you may have about the Pretty Good Oscillator: what it is, how it works, and how you can use it to improve your trading strategies. Read on!

Key takeaways

• The Pretty Good Oscillator (PGO) measures the difference between the current price and its moving average in terms of the number of average true ranges (ATR) over a chosen period.
• Developed by Mark Johnson, the PGO is a momentum oscillator that assesses how quickly the price moves above or below its moving average.
• The indicator combines trend momentum and market volatility, helping traders analyze market dynamics.
• It can be used to confirm breakouts and identify overbought or oversold conditions, which may signal potential reversals.
• The PGO oscillates around a zero line:
• Values above zero indicate bullish momentum.
• Values below zero suggest bearish momentum.
• Generally, values above +2 indicate an overbought market, while values below -2 suggest an oversold market.
• In strong trends, a rise above +2 or a drop below -2 signals increasing momentum, potentially confirming a breakout.
• We show you a backtested Pretty Good Oscillator trading strategy with trading rules and settings.
• Please click here for the best technical indicators.

What is the Pretty Good Oscillator (PGO)?

The Pretty Good Oscillator (PGO) is a technical indicator that measures the difference between the current price and its moving average of a chosen period and expresses it in terms of the number of average true ranges of the same period. Developed by Mark Johnson, the PGO is a momentum oscillator that gauges how fast the price is rising above or falling below its moving average, measuring it in terms of ATR numbers.

The indicator combines aspects of trend momentum and market volatility, providing a comprehensive analysis of the market dynamics. It can help traders identify bullish and bearish momentum situations in the market, which can help confirm breakouts, as well as spot overbought and oversold conditions, which can present reversal trade setups if the market condition favors that.

The PGO oscillates above and below a zero line, with values above zero indicating bullish momentum and values below zero suggesting bearish momentum. Depending on the asset and market condition, values above +2 could indicate an overbought market, and values below -2 could indicate an oversold market. In a strongly trending market, the indicator rising above +2 or falling below -2 only suggests increasing momentum, which could help confirm a breakout.

An example of how the indicator oscillates is shown below (lower pane):

Pretty Good Oscillator (GPO) trading strategy- rules, settings, returns, and performance

Let’s backtest a trading strategy that uses the Pretty Good Oscillator (GPO) – complete with trading rules and settings.

We make the following trading rules:

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

We buy and sell at the next bar open.

Commissions and slippage of 0.03% per trade are included.

This is a trend-following strategy, and thus, it works best for assets like gold and Bitcoin (and not for stocks).

This is the equity curve for Bitcoin from 2014 until today:

Trading statistics, returns, and performance (including commissions and slippage) for gold (GLD):

• Number of trades: 42
• Average gain per trade: 26.5%
• Annual returns (CAGR): 84%
• Win rate: 52%
• Time spent in the market: 50%
• Risk-adjusted return: 164%
• Max drawdown: 50%

The strategy outperforms buy and hold (67% annually), and has substantially lower drawdowns than buy and hold (83%).

If we lower the lookback period to 10 days, we get the following equity curve for gold (GLS since inception):

The average gain per trade is 0.4%.

This is the code we used for the backtest (Amibroker):

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

How does the Pretty Good Oscillator work?

The Pretty Good Oscillator works as a momentum indicator that gauges how fast the price is rising above or falling below its moving average. It measures this in terms of ATR numbers such that a PGO of +1.0 means that the current price is above its moving average by 1 ATR and a PGO of -2 means that the current price is below the MA by 2 ATR. A PGO of 0.0 means that the current price is the same as its moving average.

Thus, values above zero indicate bullish momentum, and values below zero suggest bearish momentum. These momentum readings can help traders confirm price breakouts. In an uptrend, increasing positive readings, say greater than +2, can confirm a rising momentum for an upside breakout. Likewise, in a downtrend, falling negative readings, say -2, can confirm an increasing downward momentum for a downside breakout.

The interpretation can be reversed to indicate overbought/oversold market conditions. That is, in an uptrend, a reading of less than -2 could suggest an oversold market during a pullback where traders can look for buy setups for the next impulse swing to the upside. Likewise, in a downtrend, a reading of more than +2 could suggest an overbought market during a pullback where traders can look for sell setups for the next impulse swing to the downside.

In a range-bound market, traders can check for overbought/oversold market conditions when the price is trading around the boundaries of the range. The indicator falling below the +2 level when the price is at the upper boundary of the range suggests a sell signal, while the indicator rising above the -2 level when the price is at the lower boundary of the range indicates a buy signal.

Who created the Pretty Good Oscillator?

The Pretty Good Oscillator was created by Mark Johnson, a popular bank technical analyst and trader, to measure the momentum of price movements. Johnson combined aspects of trend momentum and market volatility to provide a comprehensive view of the market situation.

The indicator calculates the distance of the current close from its n-period simple moving average and expresses it in terms of an average true range of the same period.

Why is the Pretty Good Oscillator important in trading?

The Pretty Good Oscillator is important in trading because it can help traders identify bullish and bearish momentum situations in the market, which they can use to confirm breakouts, as well as spot overbought and oversold conditions, depending on how the market is moving.

In an uptrend, traders can use it to gauge the bullish momentum behind an upside breakout (> +2 reading) or spot exhaustion of momentum (rising above -2) following a pullback. On the flip side, in a downtrend, the indicator can be used to gauge the bearish momentum behind a downside breakout (< -2 reading) or spot exhaustion of momentum (falling below +2) following a pullback.

It can also help confirm reversal trade setups in a range-bound market via its overbought/oversold signals.

What is the formula for the Pretty Good Oscillator?

The formula for the Pretty Good Oscillator is given as follows:

PGO = [CCP — SMA_n] / ATR_n

Where:

CCP = current close price

SMA_n = n-period simple moving average

ATR_n = n-period average true range

How is the Pretty Good Oscillator calculated?

The Pretty Good Oscillator is calculated using the following steps:

Step 1: Obtain the current period’s closing price:

You get this from the price chart.

Step 2: Calculate the moving average:

This is typically a 14-period simple moving average (SMA) of price closes, and it’s calculated as

SMA = (P₁ + P₂ +….P₁₄) / 14,

Where P is the price close for each period.

Step 3: Calculate the Average True Range (ATR):

Here, you calculate the ATR of the same period as the SMA. The ATR is the denominator and it is given as follows:

ATR = (TR₁ + TR₂ + …TR₁₄) / 14

Where TR is the maximum of the absolute distance between the index period’s high and low, the index period’s high and the previous period’s close, or the index period’s low and the previous period’s close.

Step 4: Calculate the PGO:

You calculate the PGO by subtracting the SMA value from the current closing price and dividing the result by the ATR.

PGO = (Current Close — SMA) / ATR

How do you interpret the Pretty Good Oscillator?

To interpret the Pretty Good Oscillator, you consider the indicator readings and the direction of the market. Generally, values above zero indicate bullish momentum, and values below zero suggest bearish momentum. In an uptrend, increasing positive readings (> +2) suggest a sustained momentum, which can confirm an upside breakout. Likewise, in a downtrend, falling negative readings (< -2) show an increasing downward momentum, which can confirm a downside breakout.

The interpretation is reversed for overbought/oversold market conditions. That is, in an uptrend, you don’t look for overbought conditions, as the indicator can be sustained at high readings for a long time. Instead, you focus on oversold conditions at readings below -2 during pullbacks where traders can look for buy setups for the next impulse swing to the upside. Likewise, in a downtrend, you ignore oversold conditions and focus on overbought conditions at readings of more than +2 during pullbacks where traders can look for sell setups for the next impulse swing to the downside.

In a range-bound market, you can check for overbought/oversold market conditions when the price is trading around the boundaries of the range. If the indicator falls below the +2 level when the price is at the upper boundary of the range, it suggests a sell signal. On the flip side, if the indicator rises above the -2 level when the price is at the lower boundary of the range, it suggests a buy signal. Corresponding divergence signals can also be used.

What does the Pretty Good Oscillator indicate?

The Pretty Good Oscillator indicates the momentum of price movements, expressed in the number of ATRs. It gauges how fast the price is rising above or falling below its moving average and expresses this measure in terms of ATR numbers. It indicates whether the market momentum is bullish — trading a certain value of ATR above its moving average — or bearish if it is trading a certain value of ATR below its SMA.

In some situations, it can also show when the momentum is unsustainable, which is referred to as overbought or oversold market condition.

How do traders use the Pretty Good Oscillator?

Traders use the Pretty Good Oscillator to gauge market momentum. Depending on how the market is moving, they can either use it to confirm the momentum behind a breakout or check for the exhaustion of a pullback move.

For example, if the market is trending upward and breaks out above a chart pattern, a reading of +2 can confirm a surging momentum behind the breakout. In a downtrend, that +2 reading suggests an overbought market in a pullback, which is due for a reversal for the downtrend to continue.

What are the key levels in the Pretty Good Oscillator?

The key levels in the Pretty Good Oscillator are typically +2 and -2 for the upper level and lower level respectively. These levels mark the threshold for the overbought and oversold zones, as you can see in the chart below.

However, market volatility differs from asset to asset and the prevailing market condition at any point in time. So, you have to backtest your strategy to know the right levels for the asset you are trading.

How can the Pretty Good Oscillator signal buy opportunities?

The Pretty Good Oscillator signals buy opportunities by either confirming an upside breakout of a chart pattern or showing an oversold market condition during a pullback in an uptrend. For instance, if the price breaks out above a triangle chart pattern, the PGO can confirm the momentum behind that breakout if it rises to +2 or more.

Also, if, in an uptrend, the price makes a pullback and the PGO falls below the -2 level and rises back above it, it signals a buying opportunity for the trend-continuation impulse swing. A bullish divergence suggests a buy setup too.

How can the Pretty Good Oscillator signal sell opportunities?

The Pretty Good Oscillator signals sell opportunities by either confirming a downside breakout of a chart pattern or showing an overbought market condition during a pullback in a downtrend.

For instance, if the price breaks below a triangle chart pattern, the PGO can confirm the momentum behind that breakdown if it falls below -2. Also, if, in a downtrend, the price makes a pullback and the PGO rises above the +2 level and falls back below it, it signals a selling opportunity for the trend-continuation impulse swing. A bearish divergence is also a sell signal.

What is the difference between PGO and other oscillators?

The difference between PGO and other oscillators is that the PGO combines aspects of trend momentum and market volatility to provide a comprehensive assessment of the market movement, whereas other oscillators simply focus on the momentum aspect of the market, measuring it using their unique formulas.

The volatility component of the PGO allows it to assess momentum changes as a measure of volatility.

How does the Pretty Good Oscillator compare to the RSI?

Compared to the RSI, the Pretty Good Oscillator does not just measure the market momentum but also expresses it in terms of market volatility.

While the RSI uses the ratio of up days to down days to measure the price momentum, the PGO measures how far the price is trading beyond its moving average and expresses the value as a number of the ATR.

Can the Pretty Good Oscillator predict market reversals?

Yes, the Pretty Good Oscillator can predict market reversals, but only in the short term. It is better to use the indicator to predict the reversal of a pullback in anticipation of a trend continuation than to predict a full trend reversal.

For a pullback reversal in an uptrend, you can use the oversold signal or the bullish divergence. In a downtrend, the overbought signal or a bearish divergence can predict the reversal of a pullback.

What timeframes work best for the Pretty Good Oscillator?

The timeframes that work best for the Pretty Good Oscillator will depend on your trading style and the results of your backtesting.

If you are a day trader, you have to backtest the indicator on the hourly, 30-minute, 15-minute, and even 5-minute to find the most suitable intraday timeframe for your strategy. A swing trader, on the other hand, will backtest the daily, 8-hourly, and 4-hourly to find the one that works best for swing trading.

How can the Pretty Good Oscillator identify overbought conditions?

The Pretty Good Oscillator identifies overbought conditions in a downtrend or a range-bound market. It is never a good idea to use it to identify an overbought market in an uptrend.

When the market is in a downtrend, an overbought market is identified during a pullback if the PGO rises above +2. In some markets, the +3 level may be more suitable. In a range-bound market, a PGO of greater than +2 or +3 identifies overbought conditions.

How can the Pretty Good Oscillator identify oversold conditions?

The Pretty Good Oscillator identifies oversold conditions in an uptrend or a range-bound market and never in a downtrend, as the bearish momentum can continue for a long time.

When the market is in an uptrend or ranging market, an oversold market is identified if the PGO falls below -2 or -3, depending on the asset.

How do you customize the Pretty Good Oscillator settings?

To customize the Pretty Good Oscillator settings, you have to backtest the indicator on different markets, experimenting with different settings to find out the right settings for each market.

Then, you save the setting for the different markets and use only the one that suits each market when trading that market.

What are common trading strategies with the Pretty Good Oscillator?

The common trading strategies with the Pretty Good Oscillator include:

• Breakout strategies: These aim to profit from the price breaking out of a chart pattern, such as a triangle. They are best traded in the direction of the trend. A PGO value of more than +2 can confirm a bullish breakout, while a value of -2 can confirm a bearish breakout.
• Trend-continuation swing trades: These trades are taken at the end of pullbacks to profit from the next impulse swing in the trend direction. A corresponding PGO oversold/overbought signal or divergence can be the signal for this kind of trade.

Can the Pretty Good Oscillator be used for day trading?

Yes, the Pretty Good Oscillator can be used for day trading if traded on a suitable intraday timeframe with a profitable strategy.

The key is to backtest your PGO strategy on the intraday timeframes to be sure it has an edge. If the strategy is proven to have an edge on an intraday timeframe, it can be used for day trading.

How can the Pretty Good Oscillator help in swing trading?

The Pretty Good Oscillator can help in swing trading by showing when the market is overbought or oversold or when there is a divergence in a range-bound situation so you can trade the opposite swing to the other end of the range.

It can also show when a pullback has gassed out so you can trade the next impulse swing.

What are the limitations of the Pretty Good Oscillator?

The limitations of the Pretty Good Oscillator include:

• It does not show the direction of the main trend
• It can give a lot of false signals, especially when used in the wrong market situation
• It may not be suitable as a standalone strategy

How do you avoid false signals with the Pretty Good Oscillator?

To avoid false signals with the Pretty Good Oscillator, you have to combine it with other indicators or other forms of analysis so you can identify the direction of the main trend and trade accordingly.

Indicators like moving averages can be used to identify the trend, while the PGO helps you spot entry points.

How can the Pretty Good Oscillator improve trading performance?

The Pretty Good Oscillator can improve your trading performance by helping you time your market entry. In the right market situation, you can use the PGO to confirm a breakout or identify a pullback reversal for trend-continuation trade.

With better market timing, you will increase your win rate, reward/risk ratio, and overall performance.