The Awesome Oscillator (AO) indicator is one of the most sensitive indicators within the Awesome Oscillator indicator family. There are three key values you’re going to be looking for when using the AO indicator; zero, positive, and negative. The positive and negative values are almost the exact opposites of each other: a positive value means the price is above its 34 period SMA while a negative value means the price is below it. The zero value means the price is exactly where it should be. The ideal AO reading occurs when it’s as close to zero as possible.The reason why the zero line is important is because knowing where it is help you identify if there’s a shift in momentum. If you see the AO oscillator start to cross above or below zero, then this could signal a change in momentum that may be an indicator of future price movements. If a positive value pops up, then that could mean there may be a bullish trend on the horizon. Similarly, if a negative value pops up, then that could mean there may be a bearish trend on the horizon.
The AO is usually plotted along with the MACD. AO is sometimes referred to as a “smoothed” MACD. However, the AO differs from the MACD in that it’s not a lagging indicator but rather a leading indicator of momentum.The AO is an oscillator, which-like other popular oscillators like the MACD or RSI-is a type of price-over-price momentum indicator. But the AO does not give a buy or sell signal by itself. Instead, it creates a signal that can be used to confirm other trading signals.
To use it, traders use the position of the AO’s 34 SMA to confirm when a bullish or bearish reversal is taking place in the 5 SMA. For example, if the 5 SMA crosses above or below the 34 SMA, this tells you that momentum is switching directions.
