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Contents

## Bill Williams Awesome Oscillator Strategy – Big Profits, Small Losses

The Bill Williams Awesome Oscillator strategy is a momentum strategy that takes advantage of the most immediate trend. This strategy is similar to our Breakout Triangle Strategy. This is because it will only give you entry signals when the momentum is confirming the price action shift. Our team at Trading Strategy Guides puts a lot of effort into developing strategies that provide you big wins with small losses. In essence, this means that from a risk management perspective, you’ll always trade with a superior risk to reward ratio. The AO Indicator has been called the “super indicator” because of the incredible results some traders have had using it.

The Bill Williams Awesome Oscillator strategy can be applied across different markets; be it stocks, commodities, indices, and Forex currencies. The preferred time frame for the Bill Williams Awesome Oscillator strategy is the daily time frame. This is because, after extensive research and backtesting, our team at Trading Strategy Guides has learned that the daily time frame produces the best performance.

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Before we move forward, we must define the indicators you need to trade the Bill Williams Awesome Oscillator strategy and how to use Awesome oscillator indicator.

The only indicator you need is the:

Awesome oscillator indicator: The Awesome Oscillator indicator is a histogram – that is similar to the MACD indicator – displaying the market momentum of a recent number of periods compared to the momentum of a larger number of previous periods.

If you’re interested in learning more about the MACD indicator, we recommend studying the MACD Trend Following Strategy- Simple to learn Trading Strategy which is an out of the box trend following strategy.

The Awesome Oscillator indicator uses inbuilt default settings 5 vs. 34 periods.

So, how does it work?

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Well, the Awesome oscillator indicator’s histogram (see chart below) is derived from the price chart. The Awesome Oscillator histogram is a 34-period simple moving average. This histogram is plotted through the central points of the bars (H+L)/2, and subtracted from the 5-period simple moving average, graphed across the central points of the bars (H+L)/2.

MEDIAN PRICE = (HIGH+LOW)/2

Awesome Oscillator = SMA(MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)

If the AO histogram is crossing above the zero line, that’s indicative of bullish momentum. Conversely, when it crosses below that’s indicative of bearish momentum.

Now, let’s move forward to the most important part of this article, the trading rules of the Bill Williams Awesome oscillator strategy.

Now, before we go any further, we always recommend to note down the trading rules on a piece of paper.

Let’s get started…

## The Strategy Rules

### Step #1: Check if the Awesome oscillator indicator is below zero

First, we want to make sure the Awesome Oscillator indicator is below zero. This first rule is part of a three-rule pattern called the Awesome Oscillator Twin Peaks. Don’t worry, this will start to make more sense to you once we go through all the three rules.

This brings us to the next rule.

### Step #2: Check if the Awesome Oscillator Indicator Displays Two Swing Lows and the Second Low is Higher than the First.

Second, you need to check if there are two consecutive swing lows of the awesome oscillator histogram and the second low is higher than the first one. These two swings will form the twin peaks and from here comes the term Awesome Oscillator Twin Peaks.

There is one more rule for the Awesome oscillator Twin Peaks pattern to be validated.

### Step #3: Check if the Awesome Oscillator Indicator histogram after the Second Low is Green

We need the Awesome oscillator indicator histogram after the second low to immediately turn green. This will validate the Awesome oscillator Twin Peaks pattern. When the AO histogram turns green it indicates buyers stepping in, but only a break above the zero line will signal a real shift in the market sentiment.

Now the Awesome oscillator Twin Peaks pattern has completed. But, we still don’t have confirmation that the buyers have taken the lead, which brings us to the next step of the Bill Williams Awesome oscillator strategy.

### Step #4: Wait for the Awesome Oscillator Histogram to Break Above the Zero Line Before Buying at the Current Market Price

As we already learned, the Awesome oscillator indicator fluctuates between positive momentum when trading above the zero line and negative momentum when trading below the zero line. You can notice that the AO histogram bars can change from green to read while she stays above/below the zero line. This indicates various degrees of momentum strength; However, the real shift in sentiment happens once the AO histogram crosses above the zero line which is why this is our entry signal.

At this point, your trade is opened, but we still need to determine where to place our protective stop loss and take profit orders, which brings us to the next step of our strategy.

### Step #5: Place Your Protective Stop Loss below the Most Recent Swing Low which Should Align with the Second Swing Low of the AO Twin Peaks Pattern.

The Awesome oscillator histogram should normally align with the price action. In this regard whenever the price forms a swing low this should be visible in the AO histogram as well.

We don’t want to add any buffer below the swing low level because any slightly break below the swing low will invalidate the AO Twin peaks pattern.

Now, the only component that needs to be clarified is where to take profit, which brings us to the final step of the Bill Williams Awesome oscillator strategy.

### Step #6: Take Profit as Soon as the Awesome Oscillator Histogram Posts Two Consecutive Red Bars

We take profit at the earliest sign that the market is showing us the first sign of weakness. In this regard, when the AO histogram post two consecutive red bars we want to close our position and take profit as there is a high probability the market will reverse from thereafter.

Note** The above was an example of a buy trade… Use the same rules – but in reverse – for a sell trade. In the figure below you can see an actual SELL trade example using the Bill Williams Awesome oscillator strategy.

The Bill Williams Awesome oscillator strategy is a great strategy if you’re a momentum trader. We’re not looking to catch tops and bottoms, but we seek to enter the market when the momentum has shifted in our favor. This is a more sophisticated way to trade breakouts because breakouts also signal a shift in momentum. If you’re a fan of breakout trading, we recommend reading the Breakout Triangle Strategy, which will teach you how to correctly trade breakouts.

The most popular Bill Williams Awesome oscillator strategy is trading the Awesome Oscillator Twin Peaks pattern because most of the time it signals trades with superior risk to reward ratio.

Also, please give this strategy a 5 star if you enjoyed it!

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## Williams’ Percent Range

Williams’ Percent Range Technical Indicator (%R) is a dynamic technical indicator, which determines whether the market is overbought/oversold. Williams’ %R is very similar to the Stochastic Oscillator. The only difference is that %R has an upside down scale and the Stochastic Oscillator has internal smoothing.

Indicator values ranging between -80% and -100% indicate that the market is oversold. Indicator values ranging between -0% and -20% indicate that the market is overbought. To show the indicator in this upside down fashion, one places a minus symbol before the Williams’ Percent Range values (for example -30%). One should ignore the minus symbol when conducting the analysis.

As with all overbought/oversold indicators, it is best to wait for the symbol price to change direction before placing your trades. For example, if an overbought/oversold indicator is showing an overbought condition, it is wise to wait for the security’s price to turn down before selling the security.

An interesting phenomenon of the Williams’ Percent Range indicator is its uncanny ability to anticipate a reversal in the underlying security’s price. The indicator almost always forms a peak and turns down a few days before the security’s price peaks and turns down. Likewise, Williams Percent Range usually creates a trough and turns up a few days before the security’s price turns up.

You can test the trade signals of this indicator by creating an Expert Advisor in MQL5 Wizard.

## Calculation

Below is the formula of the %R indicator calculation, which is very similar to the Stochastic Oscillator formula:

%R = -(MAX (HIGH (i – n)) – CLOSE (i)) / (MAX (HIGH (i – n)) – MIN (LOW (i – n))) * 100

CLOSE (i) — today’s closing price;
MAX (HIGH (i – n)) — the highest maximum over a number (n) of previous periods;
MIN (LOW (i – n)) — the lowest minimum over a number (n) of previous periods.

## What Is A Stochastic Oscillator?

A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0-100 bounded range of values.

### Key Takeaways

• A stochastic oscillator is a popular technical indicator for generating overbought and oversold signals.
• It was developed in the 1950s and is still in wide use to this day.
• Stochastic oscillators are sensitive to momentum rather than absolute price.

## The Formula For The Stochastic Oscillator Is

%K = ( C − L14 H14 − L14 ) × 1 0 0 where: C = The most recent closing price L14 = The lowest price traded of the 14 previous trading sessions H14 = The highest price traded during the same 14-day period %K = The current value of the stochastic indicator \begin &\text<\%K>=\left(\frac <\text– \text> <\text– \text>\right)\times100\\ &\textbf\\ &\text\\ &\text\\ &\text\\ &\text\\ &\text<14-day period>\\ &\text<\%K = The current value of the stochastic indicator>\\ \end ​ %K = ( H14 − L14 C − L14 ​ ) × 1 0 0 where: C = The most recent closing price L14 = The lowest price traded of the 14 previous trading sessions H14 = The highest price traded during the same 14-day period %K = The current value of the stochastic indicator ​

%K is referred to sometimes as the slow stochastic indicator. The «fast» stochastic indicator is taken as %D = 3-period moving average of %K.

The general theory serving as the foundation for this indicator is that in a market trending upward, prices will close near the high, and in a market trending downward, prices close near the low. Transaction signals are created when the %K crosses through a three-period moving average, which is called the %D.

## What Does The Stochastic Oscillator Tell You?

The stochastic oscillator is range-bound, meaning it is always between 0 and 100. This makes it a useful indicator of overbought and oversold conditions. Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold. However, these are not always indicative of impending reversal; very strong trends can maintain overbought or oversold conditions for an extended period. Instead, traders should look to changes in the stochastic oscillator for clues about future trend shifts.

Stochastic oscillator charting generally consists of two lines: one reflecting the actual value of the oscillator for each session, and one reflecting its three-day simple moving average. Because price is thought to follow momentum, intersection of these two lines is considered to be a signal that a reversal may be in the works, as it indicates a large shift in momentum from day to day.

Divergence between the stochastic oscillator and trending price action is also seen as an important reversal signal. For example, when a bearish trend reaches a new lower low, but the oscillator prints a higher low, it may be an indicator that bears are exhausting their momentum and a bullish reversal is brewing.

The stochastic oscillator was developed in the late 1950s by George Lane. As designed by Lane, the stochastic oscillator presents the location of the closing price of a stock in relation to the high and low range of the price of a stock over a period of time, typically a 14-day period. Lane, over the course of numerous interviews, has said that the stochastic oscillator does not follow price or volume or anything similar. He indicates that the oscillator follows the speed or momentum of price. Lane also reveals in interviews that, as a rule, the momentum or speed of the price of a stock changes before the price changes itself. In this way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals bullish or bearish divergences. This signal is the first, and arguably the most important, trading signal Lane identified.

## Example Of How To Use The Stochastic Oscillator

The stochastic oscillator is included in most charting tools and can be easily employed in practice. The standard time period used is 14 days, though this can be adjusted to meet specific analytical needs. The stochastic oscillator is calculated by subtracting the low for the period from the current closing price, dividing by the total range for the period and multiplying by 100. As a hypothetical example, if the 14-day high is $150, the low is$125 and the current close is \$145, then the reading for the current session would be: (145-125)/(150-125)*100, or 80.

By comparing current price to the range over time, the stochastic oscillator reflects the consistency with which price closes near its recent high or low. A reading of 80 would indicate that the asset is on the verge of being overbought.

## The Difference Between The Relative Strength Index (RSI) and The Stochastic Oscillator

The relative strength index (RSI) and stochastic oscillator are both price momentum oscillators that are widely used in technical analysis. While often used in tandem, they each have different underlying theories and methods. The stochastic oscillator is predicated on the assumption that closing prices should close near the same direction as the current trend. Meanwhile, the RSI tracks overbought and oversold levels by measuring the velocity of price movements. In other words, the RSI was designed to measure the speed of price movements, while the stochastic oscillator formula works best in consistent trading ranges.

In general, the RSI is more useful during trending markets, and stochastics more so in sideways or choppy markets.

## Limitations Of The Stochastic Oscillator

The primary limitation of the stochastic oscillator is that it has been known to produce false signals. This is when a trading signal is generated by the indicator, yet the price does not actually follow through, which can end up as a losing trade. During volatile market conditions this can happen quite regularly. One way to help with this is to take the price trend as a filter, where signals are only taken if they are in the same direction as the trend.

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