THEAWESOMEOSCILLATOR

Wenowcometothesecondofourfivetradingdimensions:theAwesomeOscillator(AO).Itis,without
doubt,thebestmomentumindicatoravailableinthestockandcommoclitymarkets(Figure~1).Itisas
simpleasitiselegant.Basically,itisa34barsimplemovingaveragethatissubtractedfroma5bar
simplemovingaverage.Itispossibletobeaprofitablecommodityandstocktraderusingonlythis
oscillator,aswewillexplaininthenextsection.
TheAwesomeOscillator
(TheSecondDimension)
Measuringthe
MomentumoftheMarket
islikereadingtomorrow's
WallStreetJournal
Figure51TheAwesorrleOscilLator(AO).
TheAOisa34barsimplemovingaverageofthebar'smidpoints(HL)/2thatissubtractedfrom
a5barsimplemovingaverageofthemidpoints(HL)/2.Thistellsusexactlywhatishappeningwith
thecurrentmomentum.Whenunderstoodandusedproperly,thisisthebestandmostaccurateindicator
wehavefoundinover40yearsoftrading.Ifyoureallyknowhowtousethisindicator,itshouldbe
worthatleastsevenfigurestoyouinthenextfewyears.Figure53showshowwedisplaytheAwesome
Oscillator.Asstatedearlier,itispossibletotradeprofitablyusingonlythisoscillatorandwithouteven
knowingwhatthecurrentpriceis.Forexample,whentheoscillatorturnsdown,yousimplycallyour
brokerandsay,'Sellatthemarket."Youstayshortuntiiitturnsup,andthencallandsay,"Buyatthe
market." Unbelievable? Try it on a couple of charts and you'll see. Please understand, I do not
recommendthisbecauseyoucangetmuchmoreprecisewithyourtrades.Butthinkaboutothertrader's
reactionswhenyousaythatyoucantradeprGfitablywithoutevenlookingatapricechartorasking
aboutthecurrentprice.
Figure52WhatistheAO?
UNDERSTANDINGTHEAWESOMEOSCILLATOR

TheAwesomeOscillator(AO)providesthe"keystothekingdom"whenAOisproperlyunderstood.
The AO can be used in trading both stock and commodity markets. It measures the immediate

momentumofthelast5barsandcomparesittothemomentumofthelast34bars(Figure52).Itisa
verycloseapproximationtothecontinuingMarketFacilitationIndex(MFI).(See TradingChaos,pp.
121132.)Weknowthatpriceistheverylastthingtochangeinthemarkets.Whatchangesbeforeprice
ismomentum,andwhatchangesbeforemomentumisthespeedofthecurrentmomentum,andwhat
changesbeforethespeedisthevolume,andwhatchangesbeforethevolumeisallofustradersand
investorsmakingchaoticdecisionsaboutouractivitiesinthemarkets.
IWilliams,BillM.TradingChaos:ApplyingExpertTechniquestoMaximizeYourProfits.NewYork:
JohnWiley&Sons,pp.121132.
IntheProfitunitysoftware,wecolorgreenanyhistogrambarthatishigherthantheprevious
histogrambar,andwecolorredanyhistogrambarthatislowerthanthepreviousbar.Thismakesitvery
easytoseeachangeinmomentum;allyoudoislookforachangeincolor.TheAwesomeOscillator
creates three possible buy signals and three possible sell signals. We will first examine the three
differentbuyformationsandthenthethreedifferentsellformations.Itisimportanttorememberthatwe
donottakeanyAOsignalsuntilthefirstfractalbuyorsellsignalistriggeredoutsidetheAlligator's
mouth.ThiswasthoroughlyexplainedinChapterFour.Ifyouhaveanygapsinyourunderstandingof
howtheAlligatorandthefractalcombinetocrciatebuyandsellsignal;,,donutgo~urtherunt.ilyoul
eviewandthoroughlyunderstandthepreviouschapter.
THEA0SAUCERBUYSIGNAL

Thisistheonlybuysignalwhentheh~stogramisabouethezeroline.WelabelittheSaucerbuysignal
(Figure54).Themainpointstorememberare:
1.TheSaucersignaliscreatedwhenthehistogramchangesfromadownwarddirection[thebar(b)that
precedesthecurrentbar(c)islowerthantheimmediatelyprecedingbar(a)]toanupwarddirection[the
currentbar(c)ishigherthantheprecedingbar(b)andthereforewillbeagreenbar].
2.AminimumofthreehistogrambarsisrequiredtocreateaSaucerandabuysignal.
3.Abuystopisplacedonetickabovethehighofthepricebarthatcorrespondstothefirsthigherbar(c)
onthehistogram.
4.Almostanysoftwarecancolorbarswithlowerhighsredandallbarswithhigherhighsgreen.The
Profitunitysoftwarewillmarkthebuysignalsonthepricechartitselfandwillgiveyoutheexactorder
togiveyourbroker.
Havingsoftwarethatwillcolorthebarsmakesthehistogramsupersimple.ReviewtherulesinFigure5
5.YouonlyhavetolookforachangeincolortoalertyoutoabuyorsellSaucersignal.Remember
thatwiththeSaucerbuysignal,allAObarsmustbeabovethezeroline.NotethatinFigure56there
aretwoSaucerbuys.
~lgure~4Ihe~aucer~uys1gnau
Alwaysreadfromlefttoright.
Ittakesaminimumofthreebarstocreateasignal.

Thereisnolimittohowmanybarscanbeinsideasaucer.
AllbarsinaSaucermustbeabovethezeroline
ThesignalbarwillbeaGreenBar
Youcannothaveabuyandsellatthesametime.
Aftercreatingasignal,youMUSThaveachangeofdirection(color)beforecreatinganother
signal.
Onceyouhavecreatedasignal,gotothecorrespondingpricebarandadd/subtract1ticktothe
high/low.
Figure55RulesfortheSaucerbuysignaL.
Figure56TheAOSaucerbuysignalonacoffeechart.
Figure57showsavarietyofSaucerbuysignals.Intheillustrationontheright,a,b,c,anddare
allbuysignals.Rememberthatthebuystopwillbeplacedonetickabovethepricebarthatcorresponds
tothebuysignalontheAOhistogram.Alsonotethatweonlytakethemostrecentlygeneratedsignals
of that particular dimension. The next AO signal we will examine occurs when the momentum is
crossingthezerolineontheAOhistogram.ThisisthesecondofthreepossibleAObuysignals.
THEAOCROSSBUY

Ifyoubuywhenthehistogramis"crossing"thezeroline,youareusingthehistogramcrossbuysignal
(Figure58).Themainpointstorememberare:
1.Abuysignaliscreatedwhenthehistogramchangesfromanegativenumbertoapositivenumber.
Thishappenswhenthehistogrambarcrossesthezeroline.
2.Abuystopisplacedonetickabovethehighofthepricebar,whichcorrespondstothefirstbarthat
crossesthezeroline.
3.Oursoftwarecantellyoutheexactordertogiveyourbroker.
Figure 59 shows an example of the AO crossing the zero line, going from negative to positive
territory.Thiscreatesabuysignal,whichisplacedonetickabovethehighofthecorrespondingprice
bar.OnanAOcrossbuysignal,thesignalbaronthehistogramwillalwaysbeagreenbar.Figure5
10summarizestherulesgoverninganAOhistogramcrossbuysignal.Figure511illustratesanAO
histogramcrossbuysignalonTimeWarnerstock.Itisimportanttonotethatthisapproachtotrading
andinvestingappliesequallytothestockandcommoditymarkets.

THETWINPEAKSBUYSIGNAL

ThethirdbuysignalthatiscreatedbytheAwesomeOscillatoristheTwinPeaksbuysignal.Thisisthe
onlybuysignalthatcanbecreatedwhiletheAOhistogramisbelowthezeroline(Figure512).Here
arethemainpointstoremember:
1.Thissignaliscreatedwhenyouhaveadownwardpeak(lowestlow)belowthezerolinefollowedby
anotherdownwardpeakthatishigher(smallernegativenumber,thereforeclosertothezeroline)than
thepreviousdownwardpeak.
2.Thehistogrammuststaybelowthezerolinebetweenthetwopeaks.Ifthehistogramcrossesthezero
linebetweenthepeaks,thebuysignalisinvalidated.However,crossingthezerolinecreatesabuy
signal.
3.Eachnewhistogrampeakmustbehigher(smallernegativenumber,closertothezeroline)thanthe
previouspeak.Oursoftwarewillgiveyoutheexactordertoplacewithyourbroker.
4.Ifanadditionalhigherpeak(closertothezeroline)isformedandthehistogramhasnotcrossedthe
zeroline,anadditionalbuysignaliscreated.
Figure513illustratestheplacementofaTwinPeaksbuysignal.Rememberthatthesignalhistogram
barmustbegreen.IftheAOhistogrambarisgreen,youcannotgenerateanAOsellsignal.Ifitisred,
youcannotgenerateanAObuysignal.Anotherimportantpointisthatifabuyorsellsignalisgenerated
butnothitonthecurrentbarandthenexthistogrambarchangescolor,thatsignaliscanceled.Figure5
14providesafulllistoftherulesfortheAOTwinPeaksbuy.
ReviewoftheAOBuySignals
TherearethreepossibleAObuysignals:(1)theSaucer,wherethehistogrammustbeabovethezero
line;(2)thehistogramcrosswherethehistogrambarsarecrossingthezeroline;and(3)the
Thisistheonlybuysignalbelo~thezeroline.
Thefirstpeakmustbealar~ernegativenumberthanthesecond~eak.
YourtriggerbarwillbeaGreenBarandasmallernegatillenumberthaneitherpeak.
IfanybarscrossthezerolineintheTwinPeaks,thesignalisinvalid.
ASaucersellwillbecreatedbeforeaTwinPeaksbuy.
Figure514RuLesfortheAOTwinPeaksbuysignaL.
TwinPeaksbuy,whichcanonlybegeneratedwhenthehistogrambarsarebelowthezerolineandthese
barscannotcrossthezerolinebetweenthepeaks.
WewillnowlookatthethreepossiblesellsignalsthatcanbecreatedbytheAOhistogram.
AOSELLSIGNALS

Like the three buy signals,these signals are important because they are based on momentum, and
momentumalwayschangesdirectionbeforeprices.Wecallitreadingtomorrow'sV~allStreetJournal.

AsshowninFigure515,youwillbesellingwhenthehistogramisbelowthezeroline.ASaucersell
signalistheoppositeofaSaucerbuysignal.Thesearethemainpointstoremember:
1. This signal is created whenthe histogram changes from anupward direction (bars a to b)to a
downwarddirection(barsbtoc).
2.AminimumofthreehistogrambarsisrequiredtocreateaSaucerandasellsignal.
Figure515AschematicofanAOSaucerseLLsignaL.
3.Asellstopisplacedonetickbelowthelowofthepricebar,whichcorrespondstothefirstbardown
(barconthehistogram).
TherulesfortheSaucersellareprovidedinFigure516.
InFigure517,youcanseetwosellsignalscreatedbytwoSaucers.Bothsignalswerecreatedbythe
AO'sgoinghigher(turningtheAObargreen),whichwasfollowedbyalowerbar(creatingaredAO
histogrambar).NotethattheAOmuststaybelowthezerolinebetweenpeaksanecessityforaSaucer
sell.InFigure518,notethataSaucersellsignaliscreatedbyaSaucerontheAObelowthezeroline.
Figures517and518illustratethatthesameexacttradingandinvestingtacticsworkonbothstocks
andcommodities,inalltimeframes.WewillnowmoveontothesecondAOsellsignal:theAO
histogramcrossingthezerolinesellsignal.
Al~aysreadfromlefttoright.
Ittakesaminimumofthreebarstocreatesignal.
~11barsinthesaucermustbebeloH~theZeroline.
SignalbarH~illbeaRedBar.
Youcannothaveabuyandsellatthesametime.
Aftercreatingasignal,youMUSrhalleachangeofdirection(color)beforecreatinganother
signal.
IfyourcurrentbarisGreenyoucannothaveasellsignal.
Onceyouhalleasignal,gotocorrespondingpricebarandsubtract1tick,thisisyoursellstop
price.
Figure516RuLesforseLLingwhentheAOhistogramisbeLowthezeroLine.
Figure518SaucerselLsignaLonTommyHiLfigerCorp.stock.
THEAOHISTOGRAMCROSSING
THEZEROLINESELLSIGNAL
Whenyouemploythehistogramcrosssell,youwillbesellingwhenthehistogramis"crossing"thezero
line.Rememberthesemainpoints:
1.Asellsignaliscreatedwhenthehistogramchangesfromapositivenumbertoanegativenumber.
Thishappenswhenthehistogrambarcrossesthezeroline.

2.Asellstopisplacedonetickbelowthelowofthepricebar,whichcorrespondstothefirsthistogram
barthatcrossesthezeroline.
3.Oursoftwarealsogivesyoutheexactordertogiveyourbrokerforthissignal.
Figure519isaschematicoftherequirementstocreateanAOhistogramcrossingthezerolinesell
signal.Figure520liststherulesfortakingthistrade.
Figure521illustratestheAOhistogramcrosssellsignalonaSwissFranccommoditychart.Thechart
illustrates two Profitunity concepts for increasing and maximizing profits. You will notice that the
following bar did not take out the signal bar's low. That following bar had a higher low and the
momentumcontinuedtogomorenegative,creatingwhatwelabelasa"bluelightspecial."(Thetermis
borrowedfromdepartmentstoresthatputonspecialsalesforashortperiodoftimeforthepeoplewho
happentobeinthestoreatthattime.)Themarketgivesthosewhoarewatchingthemarketcloselya
chancet~sellat2higherpric~thanthefirstsignal.ThewheatstockchartinFigure522isanother
illustrationofhowthesetechniquesworkonallmarkets.Thisfulfills"selfsimilarity,"oneoftheprimary
characteristicsoffractalgeometry.Inthemarkets,itmeansthatthevariousdimensionsinnonlinear
~Iwaysreadfromlefttoright.
Itonlytakestwobarstocreatethissignal.
Firstbarmustbeabol/ethezeroline,secondbarmustcrossbelowthezeroline.(Fromapositive
numbertoanegatil~enumber.)
Youcannotha~leabuyandsellatthesametime.
Onceasignalhasbeencreatedgototheoorre~pondingpricebarandsubtract1tick;thisisyour
sellstopprice.
Figure520RuLesfortheAOhistogramcrossingzeroLineseLlsignaL.
Figure5Z2TheA()histogramcrosssellsignalinwheat.
dynamicsmustworknotonlyacrossallmarketsbutalsoinalltimeframesarequirementoffractal
geometry.
lWINPEAKSAOSELLSIGNAL
WiththeTwinPeakssellsignal,youwillbesellingwhenthehistogramisabovetheZeroLine.Thekey
pointsare:
1.Thissignaliscreatedwhenyouhaveaupwardpeak(highesthigh)abovethezerolinefollowedby
anotherupwardpeakthatislower(smallerpositivenumberandclosertothezeroline)thantheprevious
upwardpeak.
2.Thehistogrammuststayabovethezerolinebetweenthetwopeaks.Ifthehistogramcrossesthezero
linebetweenthepeaks,thesellsignalisinvalidated.However,crossingthezerolinewouldcreatean
AOcrossthelinesellsignal.
3.Eachnewhistogrampeakmustbelower(smallerpositivenumberandclosertothezeroline)thanthe
previouspeak.

4.Mostsoftwarecanbeconfiguredtocolorthehistogrambarsforsimpleandeasyobservation.
Figure523isaschematicoftheelementsthatarenecessaryto
IcreateanAOhistogramTwinPeakssellsignal.ThisistheonlysellsignalpossiblewhentheAO
histogramisabovethezeroline.Figure524summarizestherulesforaTwinPeaksAOsell.Itisa
mirroroftheAOTwinPeaksAObuysignalwhentheAOisbelowthezeroline.Figure525shows
theTwinPeakssellsignalasitappearsonahistogramchart.Noticethatpoint(A)wasapeakandthe
AOhistogramturneddownfromthatpoint.Itcontinuedloweruntilthreebarstotheleftofpoint(B).It
thenwenthigher,forminganotherpeakatpoint(B)butlowerthanthepeakatpoint(A).Atpoint(C),
Alwaysreadfromle*toright.
Thisistheonlysellsignalabol~ethezeroline.
Thefirgtpeakmustbealargerpositil/enumberthanthesecondpeak.
YourtriggerbarH~illbeaRedBarandasmallerpositivenumberthaneitherpeak.
IfanybarsintheTwinPeakscrossthezeroline,thesignalisinvalid.
A~aucerbuy~ilibecreatedbe~oreaT~inPeakssell.
Onceasignalhasbeencreated,gotothecorrespondingpricebarandsubtract1tick;thisis
yoursellstop.

Figure524RuLesoftheTwinPeaksselLsignaL.
thehistogramturnedlower,creatingaTwinPeakssellsignalatoneticklowerthanthelowofthe
pricebarthatcorrespondstothebaratpoint(C).Nowlet'sputthepricechartuptoseehowthisplays
outinthisstock.Figure526duplicatesFigure525butaddsthepricebars.Notethatatpoint(C)we
placeasellstopjustbelowthelowofthatpricebar.Thatsignalwasnottriggeredonthefollowingbar
becauseitslowwashigherthanthesignalbar'slow.AlsonotethatallthreebarsatPoint(D)had
progressivelyhigherlows.Thisformeda"bluelightspecial,"allowingustosellatahigherpricethan
wasfirstsignaled.Itisveryimportanttonotethat,duringthesetimeperiods,thehistogramcontinuedto
fall,creatingredbars.Thisstockwasfinallysoldatthefirstbarthatrr.adealowerlow(circledonthe
pricechart).Hadthehistogramturnedupward(thebarwouldbepaintedgreen),thissellsignalwould
havebeencanceled.Repeatingforemphasis:YoucannotsellonanAOsignalifthecurrenthistogram
barisgreen,andyoucannotbuyanyAOsignalsifthecurrenthistogrambarisred.Inthecornchart
showninFigure527,youcanseeasituation
that is similar to the Liz Claiborne chart. Remember: This is the only AO sell signal that can be
generatedwhiletheAOisabovethezeroline.Atthispoint,itisagoodideatoreviewallthebuyand
sellsignalsthatarecreatedbytheAwesomeOscillator(Figure528).
AWESOMEOSCILLATORPRACTICEPAGES
ThefollowingpagesprovideseveralchartsforyoutopracticefindingtheAObuyandsellsignals.
MarkallthebuyandsellsignalsyoucanfindinFigure529beforeyoulookattheanswersinFigure
530.HowmanyofthesesignalsinFigure529wereyouabletofindandidentifyproperly?

A.Crossthezerolinesell.
B.Saucersell.
Figure530AnswerstothepracticechartinFigure529.
C.Saucersell.
D.Saucersell.
E.TwinPeaksbuy.
F.Crossthezerolinebuy.
G.Saucerbuy.
H.TwinPeakssell.
I.Saucerbuy.
J.Crossthezerolinesell.
Figure~31summarizestheAObuyandsellsignals.Next,let'sexamineFigure532,whichhasthe
price,theAOhistogram,andtheAlligator.SeeifyoucanfindthesevenAObuysignals.Besureto
locatetheAlligatorandtolookonlyforAOsignalsthatareleadingawayfromtheAlligator'smouth.
CheckyourworkagainstFigure533.Didyoufindallsevensignals?Didyourealizethatbecause
theAOwasabovethezerolineacrosstheentirechart,theonlypossibleAOsignalwasanAOSaucer
buyandthereforeallwereSaucerbuys?Now,let'slookatanexampleofrealtradinginrealmarkets.
Figure534isahistoryoftradingtheS&Pdailiesduringabullmarket.Thetradingdateswerefrom
April17throughJuly31,alittleoverthreemonths.Therewerenointradaytradesandnolookingatthe
marketduringtheday.HadyoudonenothingexcepttaketheAOhistogramtrades,youwouldhavehad
outstandingresults.Thisisaratherexceptionalexampleandwewillfollowthismarketthroughoutthe
other Profitunitv indicators. These types cf opportunities occur every week in both the stock and
commoditymarkets.NotethatonFigure534nosellsignalsofanykindweretakenbecausetheprice
waswellabovetheAlligator'smouth.Inalater
Figure534ResuLtsfromtradingonlytheAOsignalsforjustoverthreemonths.
chapter,wewillexaminethissamechartandidentifyallfivedimensionalsignals.
Table51isalistofthesesignals,whentheywereformed,whentheyweretaken,andtheprofitsfrom
tradingtheS&Pforjustoverthreemonthsinadailytimeframe.Therewasnointradaytrading.

SUMMARY

Inthischapter,wehavedescribedtheAwesomeOscillatorandpointedoutwhyitissuchagoodtool.It
is truly a leading indicator because it tracks the underlying momentum of the market. Because
momentumalwayschangesdirectionbeforeprice,wesaytheAOislikereadingtomorrow'sWallStreet
Journal.Wealsodefinedthethreedifferentbuysignalsandthethreesellsignals.Thosesignalsare:
1.TheSaucerbuyabovethezerolineandtheSaucersellbelowthezeroline.

2.ThehibtogramCl'US~i,whi~:n~reatesaseiisignaiwhenitgoesfrompositivetonegativeterritory
andabuysignalwhenitgoesfromnegativetopositiveterritory.
TheAwesomeOscillatormeasurestheimmediatemomentumofthelast5pricebarsascompared
tothelast34pricebars.
ThreetypesofsignalsaregeneratedbytheAO:
TheSaucer,theCross,andTwinPeaks
AbovetheZeroLine,theonlysignalsgeneratedareaTwinPeakssell,aSaucerbuyandabuy
Cross.
BelowtheZeroLine,theonlysignalsgeneratedareaTwinPeaksbuy,Saucersell,andasell
Cross.
Figure535RecapoftheAOsignaLs.
3.TheTwinPeaksbuysignal,whichistheonlybuythatiscreatedbelowthezeroline,andtheTwin
Peakssellsignal,whichistheonlysellcreatedabovethezeroline.
Forquickreferenceonthechapter'skeypoints,Figure636isarecap.Inthenextchapter,wewill
examinetheAC,whichisamoreprecisemeasureofthe changeinspeed ofmomentum.Oneofthe
mostvaluablecluesintradingisknowingwhentoanticipateachangeintrend.Beforeachangeintrend
canhappen,theremustbeachangeinthedirectionofthemomentum.Beforetherecanbeachangein
thedirectionofthemomentum,theremustbeaslowingdownofthemomentumandthatiswhatthis
nextdimensionisabout.IfunderstandingmGmentumislikereadingtumGrlGw'sWallstreetJGU;na7,
knowinghowtousethisnextdimensionislikereadingthedayaftertomorrow'sWallStreetJournal.