Detrended Price Oscillator (DPO), How To Use
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Detrended Price Oscillator
The Detrended Price Indicator is an oscillator that has no accredited designer and is a tool capable of smoothing out long term price trends so that traders can identify short term market tops and bottoms.
The DPO is calculated by subtracting a simple moving average over a defined n period and then shifting it back by n/2+1 periods. After the centered moving average is subtracted from its closing value, the resultant oscillator fluctuates about a zero line.
When the DPO records positive values then they are regarded as bullish signs as the price will also be moving higher. In the same way, when the DPO values are below zero, the correlated price will also be descending producing a bearish indication.
As one of the DPO main functions is to smooth out long term effects, it is particularly effective in exposing overbought and oversold conditions that would otherwise remain hidden.
Experience and research has shown that one of the best period sizes to use in the Detrended Price Oscillator is 20.
The Detrended Price Oscillator generates a buy signal when it begins to register positive values after crossing back above its zero line.
In addition, the Detrended Price Oscillator can be used to detect buying opportunities in the following way. If the DPO and price are both in an oversold position and both breakout to the upside then this is considered to be a very strong indication of a buying opportunity.
The Detrended Price Oscillator generates a sell signal when it begins to register negative values after crossing back below its zero line.
In addition, the Detrended Price Oscillator can be used to detect selling opportunities in the following way. If the Detrended Price Oscillator and price are both in an overbought position and both breakout to the downside then this is considered to be a very strong indication of a selling opportunity.
As the Detrended Price Oscillator and price are highly correlated, if fluctuations about the zero line produce minor peaks or troughs in the DPO reading then these will correspond to similar ones in price.
One of the main attributes about the Detrended Price Oscillator is its ability in detecting reversals using longer time frames. If the Detrended Price Oscillator starts registering higher lows over the selected time period then this is indicative that the price direction is about to move to the upside. Similarly, if the DPO records consecutive lower peaks then a price downturn could be imminent.
In a ranging market, enter buy trades when the Detrended Price Oscillator crosses below and then retracts above its oversold level. Likewise, enter sell positions when the DPO crosses above and the retreats below its overbought level.
If the market is trending, then activate buys when the Detrended Price Oscillator crosses below and then above its zero line whilst enter sell trades when the DPO rises above and the drops below its zero line. However, when you use the DPO in trending markets only trade with the trend that is intact.