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.
What about the indicator setting?
The Awesome Oscillator indicator uses inbuilt default settings 5 vs. 34 periods.
So, how does it work?
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
(Rules for A Buy Trade)
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.
Here you go…
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.
Also, check out our guide on the best momentum trading strategies.
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 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.
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