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Indicators: Detrended Price Oscillator (DPO)

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Automated-Trading
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Automated-Trading  

Detrended Price Oscillator (DPO):

Detrended Price Oscillator removes the trend effect of price movement. This simplifies the process of finding out cycles and overbought/oversold levels.

Long-term cycles consist of several shorter cycles. Analyzing such short components helps to define crucial moments of the cycle's development. DPO gives a chance to eliminate the influence on prices of long-term cycles. To calculate DPO you should take a certain period. Remove cycles that are longer than the chosen period from price dynamics, and leave shorter cycles. Half of the cycle's length is used for smoothing. We recommend using a period of 21 or less.

The bounds (overbought/oversold levels) come from the history of previous behavior of prices. It is recommended to stand in a long position if DPO first falls below the resale level and then gets above it. Crossing of the zero point from above followed by a rise above that level is also a signal for opening a long position. Everything is vice versa for short positions.

Author: MetaQuotes Software Corp.

Detrended Price Oscillator

Sergey Golubev
Moderator
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Sergey Golubev  

Detrended Price Oscillator

The Detrended Price Oscillator attempts to filter out trend in order to focus on the underlying cycles of price movement. To accomplish this, the moving average (generally 14-period) becomes a straight line and price variation above and below the moving average becomes the Price Oscillator. The Detrended Price Oscillator technical indicator can show overbought or oversold levels and can also create buy and sell signals.

The chart of the S&P 500 E-mini Futures contract visually depicts the Detrended Price Oscillator:


Interpreting the Detrended Price Oscillator

When the Detrended Price Oscillator is above the zero line, it means that price is above its moving average, a bullish sign. Similarly, when the Detrended Price Oscillator is below the zero line, it means that price is below its moving average, a bearish sign. There are two interpretations of buy and sell signals:

Buy Signal

  1. When Detrended Price Oscillator crosses above zero line.
  2. When Detrended Price Oscillator is in a confirmed oversold area, as referenced by prior lows of the oscillator, and the Detrended Price Oscillator and price both break the downward resistance trendline.
Sell Signal
  1. When Detrended Price Oscillator crosses below zero line.
  2. When Detrended Price Oscillator is in a confirmed overbought area, as referenced by prior highs of the oscillator, and the Detrended Price Oscillator and price both break the upward supporting trendline.
The Detrended Price Oscillator is an effective tool for uncovering hidden cycles of overbought and oversold conditions.
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