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The Power of Momentum, Divergence

& Convergence
by TradingStrategyguides | Oct 18, 2017 | All Strategies | 0 Comments

This article will discuss the Awesome Oscillator and how you can use this multiple
time frame trading to your advantage to make more pips!
But before we explain the ins and outs of this indicator, we would like to ask you
whether you use a lower case indicator? And if so, which one? Please share with us at
the bottom of the article!

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Bill William’s Awesome Oscillator
The Bill William’s Awesome Oscillator (AO) is a technical analysis indicator created by Bill
M. Williams, a trader, and educator who has decades of experience. The indicator is a
price based indicator which is shown at the bottom (or above) of the main price chart.
The indicator is designed to show current market momentum and has similarities to
another well-known momentum indicator, the MACD, The AO is also showed as a
histogram and is created using the di erence between the 34 period and 5-period
simple moving averages of the bar’s midpoints: (High + Low)/2.
As a warning though, a trader should realize that all indicators are lagging. For more
information on Forex indicators and tips, click here.
The AO bars, contrary to the typical MACD, have two colors. Green indicates that the
current bar is higher than the preceding bar. Red indicates that the current bar is lower
than the preceding bar.
How to use it
The oscillator can be used in these ways:
1)      The change in colors identi es areas and candlesticks when the momentum is
losing, maintaining, or regaining its thrust in the current direction.
2)      As with other oscillators, when the histogram bars cross the zero line the

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momentum of the price action is changing on the time frame of your chart. When
crossing from above the zero line to below the zero line, the price action momentum
has turned bearish. When crossing from below the zero line to above the zero line, the
price action momentum has turned bullish.
3)      The indicator can be used to measure divergence and convergence. When the
price reaches an extreme and the AO makes a top or bottom as well, the strength of the
move can be compared to the strength of the previous moves.
When the price makes a higher high or lower low, it is useful to check whether the AO
histograms are also making a similar higher high and lower low. If yes, the strength and
momentum of the move support price action. If not, then it could indicate that the
strength and momentum of the move are fading and it could signal the rst sign of a
potential turn around.
Be careful and only use the AO with other con rmations as the divergence could only
cause a small correction, after which price continues with the established trend. In
those cases, you could see double or triple divergence before a turnaround indeed
happens.
If a trader sees divergence, one method is to wait for the color of the histogram bars to
change. For example in a bull market wait for the bar color to turn red. In a bear
market, wait for the bar color to turn green.
4)      The indicator can be useful as well in counting the Elliot Waves. The histogram
measurement at the end of a Wave 1 normally is close to zero line and typically traveled
quite a distance to cross it. During the Wave 2 correction the histogram bars usually
retrace and re-enter the same zone, but very shallow. Wave 3 sees a very strong
momentum pushing the AO to a new extreme far above the Wave 1 top. Wave 4 should
see the AO retrace back to the zero line – either remaining in the same zone or slightly
crossing. Wave 5 then sees a new burst in the same direction was Wave 3, but the
momentum dies out and although price makes a new high or low, the AO peak usually
does not.

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Checklist
A useful tool for analyzing the AO could be a checklist where one analyzes all 4 points to
make a conclusion.
1)      Currency pair
2)      Timeframe(s)
3)      Position of the AO – above or below the zero line
4)      The color of the AO histogram
5)      Compare the extremes of price (tops/bottoms) with the extremes of the AO for
divergence
6)      Judge whether the AO matches an EW
Of course, a currency pair that has green bars above the zero line with no divergence
has a strong momentum behind it. Looking for buying opportunities on that chart or on
a lower chart makes sense. Looking for shorts would logically not be advisable. Of
course always use other methods to establish entries, exits, and take pro ts. But with
keeping an eye on the momentum, a trader will not lose track of the direction. Also
read about Fading the momentum in Forex Trading.

Multiple time frame trading

One method that allows for more context is to use multiple time frame trading.
When looking at two, three or four-time frames, the trader can judge and analyze the
meaning of price and the histogram bar of all time frames relative to each other. This
allows a trader to see that a negative AO movement in the lower zone on the 1-hour
chart could only signal a retracement of the AO back to the zero line on the 4-hour
chart.
For example, a currency that has green bars above the zero line on two time frames
most likely signals signi cant bullishness. A currency that has mixed readings on two-
time frames could indicate caution.

Retracements
The AO can also be a strong weapon in catching a Fibonacci retracement level. Instead
of buying a particular Fib retracement level with a market order at the Fib. A trader
could opt for a con rmation of the AO and rst await a change of the AO histogram’s
color back into the desired direction.

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This is especially useful when a higher time frame is set up for an up move but is
currently making a retracement which is evident by the AO retracing back to the zero
line. When the AO approaches the zero line, the trader could monitor a lower
timeframe to check for:
a)      Divergence, multiple or even triple divergences
b)      A Fibonacci retracement target or retracement level close by
c)       A change of the histogram color in the direction of the trend on the higher time
frame
If you ever wanted to make use of this indicator, please make sure you have done
proper testing! See this article about backtesting a trading strategy here.
Please let us know if you have any questions about the power of momentum,
divergence & convergence, as well as Bill William’s Awesome Oscillator.

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