Awesome Oscillator (AO)

Overview

The Awesome Oscillator (AO), developed by Bill Williams, measures market momentum by comparing recent (5-period) to longer (34-period) midpoints of price highs and lows. It’s plotted as a histogram below the chart, oscillating around a zero line.

AO is conceptually similar to MACD but uses midpoint price (HL/2) instead of closing price and is plotted as histogram only (no signal line).

Formula

Midpoint = (High + Low) / 2

AO = SMA(Midpoint, 5) - SMA(Midpoint, 34)

Default Settings

• Fast SMA period: 5
• Slow SMA period: 34
• Centerline: 0

AO bars are typically green when current bar > previous, red when current bar < previous — giving instant momentum direction visualization.

How to Use It

1. Zero-Line Crossover

• AO crosses above 0 → bullish momentum
• AO crosses below 0 → bearish momentum

2. Saucer Pattern (Bill Williams’ signature)

Bullish saucer (in positive AO territory):

1. AO above zero
2. Three consecutive AO bars: red, red (lower), green → entry signal

Reverse for bearish saucer (in negative AO territory).

3. Twin Peaks

Divergence-like setup:

• Bullish twin peaks: two negative AO troughs, second higher than first, with peak between them not crossing zero
• Bearish twin peaks: opposite

4. Color Changes

Each bar’s color (green = rising, red = falling) provides short-term momentum signal.

Strengths

• Visually intuitive — histogram color encodes momentum direction
• Saucer and twin peaks patterns offer specific entry triggers
• Captures momentum better than pure price-based oscillators by using midpoint

Weaknesses & Common Mistakes

• Saucer / twin peaks have many false signals — rule-based but not robust on their own
• Lagging — based on moving averages, signals come after the move starts
• Whipsaws around zero line — in sideways markets AO flips constantly
• Often misunderstood — the “saucer” rules are specific and easy to misapply

Best Combinations

• AO + ADX — use AO signals only when ADX confirms trend
• AO + Fractals — Bill Williams’ original system combines AO with Fractal signals
• AO + Alligator — another Williams indicator pairing for full system

Practical Example

EUR/USD H4 chart. AO crosses above zero, three bars later: red, red (lower), green — saucer pattern confirmed. Long entry on the green bar’s close, stop below the lowest of the three bars. Hold while AO stays positive.

Bottom Line

The Awesome Oscillator is part of a complete system (Bill Williams’ trading methodology). On its own it’s decent; combined with fractals and other Williams tools, it shines.