Detrend price oscillator(DPO):How to analyze the direction of the financial market using detrend price oscillator indicator

Detrend price oscillator(DPO):How to analyze the direction of the financial market using detrend price oscillator indicator

By quintomudigo | Teacher forex school | 29 Oct 2019


Detrend price oscillator is an oscillator indicator.

Being an oscillator indicator, Detrend price oscillator was mainly created to enable traders to know whether the market is in an overbought or oversold condition by  removing the long term trends from the short one thus focusing on price movement  using a displaced simple moving average.By using a displaced moving average, detrend price oscillator will be considered to be an oscillator with an oscillation at point 0.00. Just like other trading indicators, detrend price oscillator is also based on centerline and divergence. The values of detrend price oscillator is further gotten using the formula as follows;

Detrend price oscillator= closing price -SMA of{(n/2)+1} 

where n is number of period

Detrend price oscillator can further be explained using centerline(overbought and oversold) and divergence as follows;

 

Concept of centerline(overbought and oversold)

Since Detrend price oscillator is based on the centerline, it, therefore, follows that when the detrend price oscillator crosses above 0.00, that will be an indication of an upward market movement thus the trader should be trading upwards while when the detrend price oscillator crosses below 0.00, that will be an indication of a downward market movement thus the trader should be trading downwards. When the dentrend price oscillator falls further below -0.0002 that will be an indication of an oversold market condition thus signaling the trader to close any sell position and opens a buy position since the market will start an upward trend.On the other hand, for upward market trend, when the detrend price oscillator rises further to above 0.0002, that will be an indication of an overbought market condition thus signaling the trader to close any buy position and opens a sell position since the market will start moving downwards. This is indicated as from the candlesticks chart below;

 

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From the candlesticks chart above, there are two points, point A and point B. At point A, the detrend price oscillator has risen above 0.0002 thus an indication of an overbought market condition at that point.This will signal the trader to close any buy position and open a sell position since the market is starting to move in a downward direction at that point.On the other hand ,at point B, the detrend price oscillator has fallen below -0.0002 thus an indication of an oversold market condition at that point.This signals the trader to close any sell position and opens a buy position since the market is starting to move upward at that point

 

concept of divergence

Also, since detrend price oscillator is also based on divergence, it, therefore, follows that when the detrend price oscillator is moving downwards at above 0.00 while the price is moving upwards, the price will reverse and start moving downwards in the same direction as the detrended price oscillator.On the other hand, when the detrend price oscillator is moving upwards at below 0.00, while the price is moving downwards, the price will reverse and start moving upwards in the same direction as the detrended price oscillator. This is indicated as in the candlesticks below;

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From the candlesticks chart above, there are 3 points, point A, B and C. Point A and B are the divergence points while point C represents the detrended price oscillator.At point A, the market was moving upwards while the detrended price oscillator was moving downwards at above 0.00. This was an indication of an overbought market condition at point A thus the market reversed and start moving downwards in the same direction as the detrended price oscillator. This will signal the trader to close any buy position and open a sell position.On the other hand at point B, the market was moving downwards while the detrended price oscillator was moving upwards at below 0.00. This was an indication of an oversold market condition at point B thus the market reversed and start moving upwards in the same direction as the detrended price oscillator.

 


Recommendation:If you are a day trader just use 1 min,5 min, 15 min and 30 min timeframe while if you are a swing trader just use 1 hour and above timeframe if you want detrended price oscillator to work well for you.

 

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quintomudigo
quintomudigo

Trader, Blockchain Technologist and Contentpreneur. Also founder and CEO @ Teacher Forex School.


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