What is the Bill Williams Awesome Oscillator? 

The Bill Williams Awesome Oscillator is an indicator that traders use to measure momentum in a market. Like all indicators, it is typically used as part of a larger trading system.

The AO is plotted in its own window at the bottom of a MetaTrader platform and has a zero line much like many other oscillators. The indicator uses the 34 simple moving average and the 5 simple moving average in its calculation.

The indicator takes the difference between the two moving averages and plots them in a histogram. 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 oscillator is generally used to confirm a trend but can also be used to anticipate a potential reversal of the trend. As an oscillator, it will fluctuate above and below the zero line which is considered neutral. In its standard form, the histogram will print out in red or green bars, with the bar turning green when its value is higher than the one before it.

If the bar of the histogram is lower than the one before, it will turn red. When the histogram is above the zero line, it indicates that the shorter moving average is trending higher than the longer one.

You can think of this much like a moving average server system. When the values are below the zero line, the short term moving average is lower than the longer one, showing a downtrend.



 

To add the Awesome Oscillator to your trading platform, you need to click on the ‘Insert’ menu, go down to the ‘Indicators’ submenu, and then select the ‘Bill Williams’ submenu, followed by selecting ‘Awesome Oscillator’.

You will notice that the default setting is to have a green bar for ‘Value up’, and a red bar for ‘Value Down.’ You can change these colors but for the purposes of demonstration in this article we will keep them the same.

While the indicator is typically part of a larger system, there are a couple of basic ways that it is typically used. The easiest way is to simply wait for the oscillator to cross the zero line. For example, if it’s below and rises above the zero line, it’s considered to be a ‘bullish cross’.

On the other hand, if the AO drops below the zero line you can consider it to be a ‘bearish cross’. This adds more confidence to a potential selling position as the underlying moving averages are in congruence and both moving lower.

Take a look at the chart below of the four-hour CAD/JPY pair.



The market breaking down right at the red arrow accompanied by the AO 'bearish cross' gives the trader an opportunity to start selling.

 You should also pay attention to the fact that once the indicator produced several green candlesticks, the market entered a bit of consolidation and a lot of traders would have taken profits there. Having said that, the indicator tends to work a bit better if you keep in mind the overall trend.

For example, when the oscillator went back to form ingrained bars where the trade leveled out, it wasn’t a matter of buying, rather a signal to either get out of the market or tighten up your stop loss.

 Take a look at the chart below, as it now has a 50 EMA plotted on it.



 When the signal kicked off at the top of the chart, it was a clear breakdown of that EMA.

Furthermore, the EMA was still above price action and turning lower when the oscillator went back to green. By using the indicator to tell you what phase the trend is an, traders could have held on to this position for much further gains.

Another way that traders use the Bill Williams Awesome Oscillator is to find divergence.

Divergence is when momentum and price aren’t matching.

In other words, if price is rising but momentum is falling, that’s a sign that perhaps the underlying momentum and fundamentals of the market are starting to deteriorate.

Conversely, if the price is falling but the momentum is becoming more bullish, then it’s possible that the sellers are starting to run out of underlying momentum, meaning they may be likely to flip their position.

The Bill Williams Awesome Oscillator works the same way as any other oscillator in this sense. What you are looking for is a peak that doesn’t quite continue the overall momentum of the previous peak, while the price continues. Notice on the chart below the price was rising while the AO was running out of momentum.



Notice how the first high was higher than the second one, even though prices continue to drift to the upside. Shortly thereafter, markets broke down a bit, which is the very essence of using divergence for trading.

This isn’t necessarily a signal in and of itself, but it tells you that something isn’t quite right. With that in mind, there are a couple of ways to play this. Depending on when you enter the market, the divergence of an oscillator can mean several things.

For example, let’s say that you had bought this pair somewhere closer to the bottom, but she started to notice that divergence was showing itself in the oscillator.

That’s a warning that you may need to move your stops closer, or perhaps get out of the market altogether. Let’s say that you were in the market, but you started to see divergence.

At this point you start looking for an opportunity to sell based upon whatever system you are using. Bear in mind that the price could have just as easily gone sideways after divergence and then picked back up over the longer term. It is yet another signal, not a system in and of itself.

Divergence can:

• signal a slowing market
• offer hints as to when you may need to tighten stop losses
• give the trader an opportunity to look for a reversal signal
• come and go without major ramifications, meaning that it is only part of the system.

The Bill Williams Awesome Oscillator is an indicator that is relatively simple to use and isn’t hard to set up. In fact, it will come with any MetaTrader platform you are using.

It’s important to remember that it isn’t a signal in and of itself. However, what it does do is give you an idea of what a couple of moving averages might look like on your chart without plotting them on your chart itself.

Remember, this is simply measuring the difference between the 5 and 34 simple moving averages. In other words, it lets you know when these widen out, and start spreading which for moving average traders suggests that momentum is picking up. The farther away from the zero line the oscillator gets, the more spread out we are and then hence should continue to see momentum.

The zero line being crossed itself is simply a function of a moving average crossover. This just means that the moving average has crossed over the other one, just as you would see on a moving average of a system that would be plotted on your chart. In that sense, the oscillator itself is just another take on moving averages overall. This isn’t to dismiss this indicator, it just shows that it is another way to express the overall momentum of the marketplace, something that can be done through a multitude of indicators.

It should be noted that price action comes first, and before that even comes into play you should be looking at support and resistance. That being said, if the market does break through a supporter resistance area, the Bill Williams Awesome Oscillator can give you an idea as to whether or not momentum will continue.

This is a trend-following indicator, so it is not something to be used in a short-term range bound market.

The indicator itself was built by Bill Williams, as we’re sure you have guessed, and has been around for some years. When using the Bill Williams Awesome Oscillator, you should think of it more or less as a tertiary signal, as support and price action should dictate what you do first.