Bill Williams Accelerator Oscillator as an Early Warning System
One of the great aspects of the Bill Williams Accelerator Oscillator is that it can function as an early warning system. For example, if you start to see price rising but the Accelerator Oscillator rolling over, that can be the first sign of trouble. It functions very much like divergence in any other oscillator, when momentum is moving opposite of price.
When trading, most of the time you are looking to go with the overall trend. However, when you can find out that the trend is about the end or at least there is going to be a significant pullback, you can save a considerable amount of your trading capital by taking profits at that point. At the very least, it gives you an opportunity to move your stop loss closer to the current price of the financial asset that you are trading.
Take a look at the chart below. The Australian dollar/New Zealand dollar pair on the weekly timeframe is shown. You will notice that on the far left-hand side there is a pair of blue arrows that shows a market that was clearly in a downtrend, but the Accelerator Oscillator was starting to rise. In fact, it had formed a couple of green bars. This was a sign that the downtrend was running out of momentum.
A little while later, you can see that the market had clearly been in a strong move to the upside but notice how by the time the first red arrow on the chart is pointed out, the histogram in the Accelerator Oscillator formed a “lower high.” Beyond that, the histogram also started to turn red while price was still rising slightly. This was the beginning of the end for the buyers, and as you can see not only could a buyer have taken profit, but short-sellers could have been looking for an opportunity to sell which did in fact present itself shortly thereafter.
And even later on the chart, you can see that price was rising again, but this time the histogram in the indicator didn’t rise above the previous time. Price did, but the momentum did not and that is classic divergence. Notice how the indicator started to drop from that level, forming several red bars. Furthermore, it ended up dropping below the zero line and eventually the markets fell rather significantly. What’s interesting about these examples is that you had several candlesticks to react. In this case, that means several weeks. The same principle would of course apply to a five minute chart, so timeframe is rather irrelevant, but it does suggest that you have time to make a decision or at least look for confirmation of that potential scenario.
All of this shows that the Accelerator Oscillator can function on several fronts, not only as a confirmation of a potential set up but also has the ability to tell you when to exit a trade or trend. This makes it extraordinarily valuable, even though it’s not one of the more well-known indicators. It should also be noted that quite often Bill Williams has suggested that some of his other indicators should be used in congruence with this one, but it’s crucial that you understand how this indicator functions on its own, and thereby you can choose to build a system based upon some of his others.