Mastering the awesome oscillator divergence: Strategies, screeners, and MetaTrader 5 integration

Introduction to the awesome oscillator and divergence

The Awesome Oscillator (AO), developed by Bill Williams, is a momentum-based technical indicator that compares the 34-period and 5-period simple moving averages (SMAs) of an asset’s median price. Displayed as a histogram, the AO visually represents shifts in market momentum and helps traders spot potential trend reversals.

When paired with divergence analysis, the AO becomes even more powerful. Divergence occurs when price movements differ from the behavior of the AO, signaling possible reversals or changes in trend direction.

Identifying awesome oscillator divergence

Divergence occurs when the price action of a security moves in a direction opposite to the AO. It is a widely recognized concept in technical analysis used to predict potential trend reversals.

Divergence between the AO and price action comes in two main forms:

• Bullish Divergence: Occurs when the price forms lower lows, but the AO displays higher lows. This suggests weakening bearish momentum and hints at a potential uptrend.
• Bearish Divergence: Occurs when the price makes higher highs, but the AO forms lower highs. This divergence indicates waning bullish momentum and a possible downtrend.

 Recognizing these divergences early can help traders time their entries and exits with precision.

How to spot bullish and bearish divergences with the awesome oscillator

Bullish Divergence

1. Identify a downtrend where the price forms successive lower lows.
2. Simultaneously observe the AO for higher lows.
3. This pattern signals that bearish momentum is diminishing and a reversal might occur.

Bearish Divergence

1. Identify an uptrend where the price sets successive higher highs.
2. Check if the AO shows lower highs during this period.
3. This indicates that bullish momentum is fading, which could lead to a downward reversal.

Awesome oscillator divergence on MetaTrader 5

MetaTrader 5 (MT5) is a leading trading platform equipped with a comprehensive suite of tools and indicators, including the Awesome Oscillator. MT5’s flexibility allows users to customize and automate divergence detection, making it an excellent choice for traders.

Setting up the awesome oscillator divergence indicator on MetaTrader 5

Note: Though some platforms allow the settings for the awesome Oscillator to change the period of Moving Averages, the MT5 platform does not offer this functionality.

1. Add the Awesome Oscillator to Your Chart:

• Open your MT5 terminal and select a trading chart.
• Navigate to the "Insert" menu, then "Indicators," followed by "Bill Williams," and select "Awesome Oscillator."
• The AO will appear as a histogram beneath your main price chart.

2. Automate Divergence Detection:

• Use custom scripts or expert advisors (EAs) to highlight divergences automatically.
• Download pre-made AO divergence indicators from the MQL5 marketplace or code one using MQL5 if you have programming knowledge.

3. Optimize Settings:

• Adjust AO parameters or divergence thresholds based on your trading strategy.
• Use MT5’s Strategy Tester to backtest your settings against historical data.

Practical examples of using awesome oscillator divergence in MetaTrader 5

Example 1: Bullish Divergence Scenario: A currency pair in a downtrend shows its price dropping to a new low of 1.1000. However, the AO histogram displays a higher low. Action: After confirming the divergence with other indicators or candlestick patterns, consider entering a long position.

Example 2: Bearish Divergence Scenario: A commodity reaches a new high of $2,000, but the AO forms a lower high than its previous peak. Action: Use this bearish divergence as a signal to close long positions or consider shorting the asset after further confirmation.

Conclusion:

The Awesome Oscillator is a basic technical indicator that can be used to spot potential trend reversals.

Though often reliable, it can in some cases provide false signals, which is why it is best used with other indicators (like the RSI, Moving Averages, or Bollinger Bands) to confirm its readings and enhance its usability.

Although the settings for the awesome Oscillator cannot be changed on the MT5 platform, as they are embedded in the code, it can still prove to be a useful tool for seasoned traders.