Using the Awesome Oscillator developed by Bill Williams with the RSI (relative strength index) combines the power of measuring momentum with the Awesome Oscillator Indicator and overbought or oversold conditions with the RSI.
The Awesome Oscillator (AO) may be new to some traders so here is a brief outline of this trading indicator. You can find more about the RSI here.
What Is The Awesome Oscillator
Bill Williams usage was to measure the momentum in the Forex market (or any market) by using a combination of:
- 34 period simple moving average of the median of the previous 34 candlesticks
- 5 period simple moving average of the median of the previous 5 candlesticks
- Zero line plus histogram
- When the AO is below the zero line, we can determine that the short term moving average, 5 period SMA of median price, is lower than the 34 period moving average. This is a down trend
- When the AO is above the zero line, we can determine the trend is now an uptrend
- When the histogram is rising green, we can determine that the AO value of this candlestick if higher than the previous
- When the histogram is falling red, the value of the AO is less than the previous candlestick
While some traders may present these are buying or selling signals, they more accurately present an opportunity and not a signal to buy or sell at that moment.
We can also use an AO term called a “twin peak” which can show divergence in the Forex pair you are trading.
You can see this currency pair make a lower low on the right but the awesome oscillator is making a higher peak. The key is that the area between the two peaks remains above or below the zero line depending on location of the peaks. In this case of this chart, we need the histogram between the peaks to remain below the zero line.
Awesome Oscillator + RSI Forex Trading Strategy
We are going to combine the awesome oscillators ability to help determine momentum with the RSI overbought/oversold condition to produce a trading strategy. This is a form of technical analysis and we will use price action to trigger us into a trade.
We can day trade, swing trade, and even position trade these setups. Your time frame will depend on how much time you can devote to trading.
Regardless of your approach, ensure a stop loss is used and that risk management is considered before taking any trading signal.
Now that you’ve understood the background, lets got straight in to actual rules of how to trade the RSI with awesome oscillator. For the buying and selling rules that you are going to read below, refer to this chart where you can see examples of a sell and buy setup:
On the left, we are looking at a trading setup to go short
- Has the 14 period RSI been above the 70 level? If yes, has it turned below that level?
- If the RSI is now less than 70, is the Awesome Oscillator showing us a red histogram bar?
- If the AO is showing red, we look to sell 2-5 pips below the current candlestick to allow price action to take us into the trade
On the right, we are looking at a trading setup to go long
- Has the RSI been below the 30 level? If yes, has it turned above that level?
- If the RSI is now above 30, is the Awesome Oscillator showing us a green bar?
- If the AO is showing green, we look to buy 2-5 pips above the current candlestick to allow price action to take us into the trade
There may be times where the cross of the RSI is followed 1-2 candlesticks later with a turn of the awesome oscillator color. A trader may consider that still valid however a trading plan may have a limit on the number of candlesticks that it takes to turn the AO.
Also note that we are not concerned with the zero line cross although you may wish to use the histogram crossing zero as a time to add to your position. If you recall, a zero line cross indicates a trend change and it is possible that by using the RSI, you are picking up an oversold/overbought Forex pair and catching a trend reversal.
Stop Loss And Profit Targets
Stop loss is essential to your longevity as a Forex trader. There are many ways to set a stop loss and you may consider using the swing high/low that precedes the trading setup as one.
Just ensure you are not setting your stop right below swing lows or above swing highs.
Those are places of liquidity and I personally use those zones as failure test trades. You will be getting taken out of your position at the time you should be entering.
Another stop loss plan is to use a multiple of an ATR such as 1.5 X ATR and that uses the actual volatility of the currency pair you are trading.
Profit targets can be set as a multiple of your risk or for a more trend following approach, hold your position until the zero line of the awesome oscillator is crossed in the opposite direction of your trade. Picking tops and bottoms is rare but it can be done at times. Catching the start of a trend run can make your year!
Perhaps even consider getting out with an oversold/overbought condition however the markets can stay in that condition for quite a while. It does NOT mean the trend is reversing.
Simple Market Analysis
I think this is a decent approach to the market especially for those beginning market analysis. Knowing when momentum is in the market combined with a market that is “overdone” can teach a new trader a lot about price action and market tendencies.
Are there drawbacks? Sure.
Getting chopped in price consolidations can be tough on a trader and that can certainly happen with this strategy. Using price action as a technical analysis way of seeing consolidations form (that includes chart patterns such as triangles), can save a trader a ton of grief.
Once a market stops makes higher highs/ higher lows or lower highs and lows, then you run into some issues with forming ranges. Just be aware.
Overall, fire up your chart and add these indicators to see if you can find a trading edge with them.