Acceleration / Deceleration Oscillator

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The Acceleration / Deceleration Oscillator, commonly known as the Accelerator Indicator, is a technical indicator developed by Bill Williams to measure the strength of changes in the price of an asset.

The idea behind this indicator, according to Bill Williams, is that price is the last thing to change. First they change the strength of their variations and lastly, the price is rotated. For example, before changing an uptrend, the price rises with less and less force (deceleration) until finally the uptrend ends and a downtrend begins.

The appearance of the indicator is simple. A histogram with bars that can be above zero or below zero. And, whose color, can be green or red. Positive values ​​(above zero) indicate an uptrend and negative values ​​(below zero) indicate a downtrend.

How is the Acceleration / Deceleration oscillator calculated?

To calculate the Acceleration / Deceleration oscillator we will use the Amazing oscillator as a base. So, the Acceleration / Deceleration oscillator formula is:

AC = AO - MMS (AO) of 5 periods

To take into account the following considerations:

  • AO = Amazing Oscillator, in English Awesome Oscillator (AO)
  • MMS = Simple Moving Average
  • AC = Acceleration / Deceleration Oscillator, commonly known as Accelerator Oscillator (AC)

In such a way that the Acceleration / Deceleration oscillator is the result of subtracting from the value of the Amazing oscillator, the value of the simple moving average of the last five periods of the Amazing oscillator. In much simpler words, and to understand the calculation well, we will divide it into three phases:

  1. Amazing oscillator calculation. See Amazing oscillator calculation
  2. Calculate the 5-period simple moving average of the Amazing oscillator.
  3. The values ​​obtained in phase 1 and 2 are subtracted.

The color of the histogram bars depends on:

  • Green bar: The value of the current bar is greater than that of the previous bar. That is, if it is above zero, the bar will be green if its size is greater than the previous bar. And, if it is below zero, the bar will be green if its size is smaller than the previous bar.
  • Red bar: The value of the current bar is less than that of the previous bar. Or what is the same, if it is above zero, the bar will be red if its size is less than the previous bar. And, if it is below zero, the bar will be red if its size is greater than the previous bar.

Trading with the Acceleration / Deceleration Oscillator

As with other Bill Williams indicators such as the Alligator indicator or the fractal indicator, it is advisable to use them together. However, whether it is used alone or as a complement to other indicators, there is an unbreakable rule that we must know:

Long positions are never opened if there is a red bar and short positions are never opened if there is a green bar.

That said, there are several uses that we can do with this indicator:

  • Zero line crosses

If the indicator is above zero, the trend is bullish. Therefore, if the indicator is below zero and crosses the zero line upwards, it is a sign of a long position. For instance:

Conversely, if the indicator is below zero, the trend is bearish. That is, if the indicator is above zero and crosses the zero line downward, it is a signal of a short position. For instance:

To close positions, the opposite fact can be adopted as a rule. When there is a signal of a long position, the short positions are closed. And, when there is a short position signal, the long signals are closed.

The color change of the bars can also be adopted as a rule. For example, the case of a long position. It opens when the oscillator crosses the zero line upwards and closes when (despite being above zero) a red bar appears.

  • In combination with other Bill Williams indicators

It is the most recommended option. This indicator was built in order to be part of the Bill Williams trading system. Therefore, the author does not recommend using it alone. An example of a combination would be to use it with the Alligator indicator in such a way that the operating rules are:

All three averages of the Alligator indicator are below price (uptrend) and the accelerating oscillator crosses the zero line to the upside. Long position signal. For instance:

The three averages of the Alligator indicator are above the price (downtrend) and the accelerating oscillator crosses the line from zero to the downside. Short position signal. For instance:

  • Red and green bars

Lastly, there is a third option. If the indicator appears with a red bar (even if it is above zero) it is a sign of a short position. If the indicator draws a green bar (even if it is below zero) it is a signal of a long position. This way of using it, despite existing is not a good option.

If we use it based on these last rules, the indicator can give many signals that end in losses. And consequently, we can lose a lot of money by trading. In any case, if a trader decides to operate with these rules, he must first take a test to verify that as a trading system it is profitable.

Tags:  finance present markets 

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