An irrefutable fact is that the price of an asset moves in a flat most of the time. In such a situation, trend indicators cannot help in finding a point to enter the market.
For flat trading, oscillators show effective analysis. The article provides an overview of the Detrended Price Oscillator - DPO, describes the instrument itself, its settings, trading strategies and rules for its use.
What is Detrended Price Oscillator - DPO aka untrended price oscillator
The DPO oscillator is a tool for analyzing sideways price movements. This oscillator is an advanced moving average (MA) indicator. The main difference from the moving average is that the calculation of the oscillator readings includes only information for the current time period, with a slight smoothing. The logic of work is the following:
- A working period is selected for the instrument, for example, M5.
- Work cycles longer than 5 minutes are not taken into account by the oscillator formula.
- Working cycles less than 5 minutes are taken into account (M1-M5).
- Reading smoothing is calculated from half the total length of the previous values.
In simple words, the tool calculates the overall dynamics for a 5-minute period when trading on M5. This approach allows you to ignore the dynamics of market noise.
The DPO oscillator is a line drawn between two values (the current day's high and low). The main indicator for making deals is the central, zero range. When it crosses, the line gives a signal to open a deal, thereby indicating the state of the asset (beginning of overbought or oversold).
Installing and configuring the indicator
The trendless price oscillator is integrated into most trading platforms, including Metatrader 4. The tool is widely used by traders who prefer an automatic trading process.
To add this indicator in the Metatrader 4 platform to the main price chart, you must follow the instructions below:
- Select the "Insert" menu at the top of the trading platform.
- Click "Indicators".
- Select the "Custom" tab from the drop-down menu.
- In the next drop-down menu, specify the DPO.
- The "Period" value in the active window should not be changed.
The schedule is formed, you can work with the material.
MAPeriod of the moving average: 14. To smooth the indicator, it is necessary to increase the period. To view short-term signals and quickly react to market dynamics, you should reduce the period.
When working with the oscillator settings, the investor can adjust them each time to suit his own goals. By changing the parameters, the trader gets different curves according to the degree of smoothness
BarstoCount (bars): 400. This means that the last 400 bars are used in the calculations. This number ensures the smoothness of the moving average, all short price fluctuations are displayed.
To increase the accuracy of the signal, you need to lower the indicator. In this situation, you should remember that you can miss the main turning points. That is why investors use the oscillator as an auxiliary, combining it with other indicators.
Detrended Price Oscillator Signals
Like any other technical indicator, Detrended Price Oscillator generates trading signals. Let's start with the simplest ones. If the chart is above zero, you should look for confirmation of an uptrend and be ready to buy. If it is below a critical level, they check for a downtrend and set up for sale. Naturally, these messages cannot be used to immediately enter the market. The number of false calls here is too high, so confirmation from other analytical tools is always required.
The following signals are more credible.
The breakout of the zero level from below may indicate the expediency of buying. Another such message is generated when the indicator, which is in the oversold zone, breaks through the border at the same time as the price. Sell signals appear in a similar way. They occur when the chart crosses the zero mark from above and when it leaves the overbought border along with the price. The reversal points of the long-term trend are new extremes: the maximum is towards the upward direction, the minimum is towards the downward movement. These reports also always require additional study.
Overbought and oversold levels are set based on the situation on the market and the dynamics of its development. Each is determined with the location of these lines independently. One of the most common ways is to average several of the most severe highs/lows. The resulting numbers become the corresponding levels. The advantage of this approach is dynamism, because the lines are set according to the current market volatility.
In general, the very occurrence of the indicator in the oversold / overbought zone is considered to be a good enough moment to take profits. Especially when it comes to novice traders who are just getting used to the market. Even if the trend continues and the price moves in the same direction, you should not get too upset about the lost income. In the long term, such a strategy is much more reliable, because price support and reversal exit do not always justify themselves. It turns out a classic choice between a tit and a crane, while catching the latter requires sufficient experience and skills.
Difference between Detrended Price Oscillator (DPO) and Commodity Channel Index (CCI)
Both of these indicators try to capture price cycles, although they do so in different ways. DPO is primarily used to estimate the time it takes an asset to go from peak to peak or low to low (or peak to low or vice versa). The Commodity Channel Index (CCI) is usually between +100 and -100, but a break from these levels indicates that something important is happening, such as the start of a new major trend. Therefore, CCI focuses more on when the main cycle can start or end, rather than the time between cycles.
Advantages of using the Detrended Price Oscillator (DPO)
The Detrended Price Oscillator indicator can be described as a very handy tool that is necessary to find short-term cycles that you should always have in your arsenal.
It visually displays price fluctuations, and with its help you can conveniently find kickbacks and small corrections. This indicator is one of the best today.
Limitations of using the Detrended Price Oscillator (DPO)
DPO does not provide trading signals on its own , but rather is an additional tool to help determine the timing of trading. He does this by looking at when the price has peaked and bottomed out in the past. While this information may serve as a guide or a basis for future expectations, there is no guarantee that the historical cycle length will repeat itself in the future. In the future, cycles may become longer or shorter.
The indicator also does not take into account the trend. The trader must determine in which direction to trade. If the price of an asset is in free fall, it may not even be worth buying at the bottom of the cycle, as the price could continue to fall anyway.
Not all DPO peaks and troughs will move to the same level. Therefore, it is also important to look at the price in order to mark important peaks and troughs on the indicator. Sometimes the indicator may not fall much or rise much, but the reversal from this level can still be significant for the price.
Detrended price oscillator indicator can be described as a very handy tool for identifying short-term cycles, the presence of which in the arsenal never hurts to have. It is an atypical oscillator, but it also has a classic drawback - delay. It is contraindicated to use this indicator as the sole provider of trading signals. Yes, it visually displays price fluctuations and with its help it is quite convenient to catch small corrections and rollbacks. In this indicator is one of the best to date. However, if you do not reinforce the DPO readings, then the whole process will be more like guessing. Naturally, such an approach will never give serious results. But in combination with other tools, Detrended Price turns into a very effective "weapon" of analysis.