In Forex, one of the most successful strategies are the ones following the trend, so the sooner you can determine a trend, the more you can profit from it. There are many different ways to determine the beginning of a new trend.
But you have to assume that price is the last element that changes. Before price changes, the market driving force changes, and before it changes its direction, the acceleration of the driving force must slow to zero. It then starts accelerating in the other direction until the price changes its direction.
The Forex Accelerator Oscillator is designed by renowned trader Bill Williams specifically to provide early warning signals of the changing force driving the market. And today, we will learn what the Accelerator Oscillator is, as well as how to use it in trading.
What is the Accelerator Oscillator?
Bill Williams is a world-famous trader, developer of analytical indicators, and creator of the Profitunity strategy. In 1987, his first works on stock market trading were published. Even then, the author severely criticized the usual methods of chart analysis. In his opinion, fundamental and technical analytics are lacking in objectivity. Williams was convinced that a complex of random factors had a key influence on the pricing of a particular financial instrument.
For the first time, the description of the Forex Accelerator Oscillator appeared as a measurement of the third factor in his theory of trade chaos. This indicator is a logical continuation of the author's indicator Awesome Oscillator.
The purpose of this tool is to identify acceleration points in the price and demonstrate positive or negative dynamics. This indicator is one element of the Bill Williams Profitability trading strategy.
Williams has noted that market prices are constantly changing. It is important not only to see the trends but also to base the work on the price behavior, from the beginning of the current trend slowing down to the beginning of a new one.
When analyzing market processes, Bill Williams said that prices decrease the speed of their change before correction or reversal, and when the trend increases, the speed of price change increases as well. The Accelerator Oscillator changes its direction after a change in the driving force, which usually indicates a possible trend change.
The Accelerator Oscillator is considered a leading indicator because before reversing, the price has to reduce the speed of its movement in the current direction, which means it has to have data on price acceleration (positive or negative). If the dynamics slow down, the indicator histogram should be the first to reverse, and if the current dynamics accelerate, it should show growth.
The Bill Williams Accelerator Oscillator is able to predict the price dynamics phases in advance quite accurately, which is also valuable for traders - its advantage is that it reads ahead of time.
In most technical analysis programs, the Forex Accelerator Oscillator chart is drawn as a histogram, with periods of growth being drawn in green bars of the histogram and periods of decline - in red.
The feature of this indicator is a redrawing of the last bar. Until the candlestick is closed, the last bar of the indicator may change color, so it is very important to work with the Accelerator Oscillator after the bar is closed.
The zero line is essentially the place where the driving force is balanced with acceleration. If the Accelerator Oscillator is above zero, it is usually easier to continue upward. In contrast to Awesome Oscillator, crossing the zero line is not a signal. The only thing you need to do to control the market and make decisions is to follow the color changes.
The indicator created by Bill Williams is designed to work on all types of markets: currency, stock, commodities, and indices. It is especially effective for trading trend assets with high volatility.
However, it should be remembered that there are no universal tools that work equally well in all types of markets. All strategies need to be tested on historical data. The testing of trading systems signals based on the Forex Accelerator Oscillator shows contradictory results
Calculating the Acceleration Oscillator
As we have mentioned, the indicator looks like a histogram with a zero mark as well as negative and positive values. It consists of consecutive bars, which shows how the dynamics of the last five price bars have changed from the previous 34.
The crossing of the zero mark bars up or down, respectively, indicate the development of market movement force in the north or south direction.
The Bill Williams parameters are calculated using the following formula:
AC = AO - SMA (AO,5)
As can be seen from the formula, the slightest price change will have a sharper impact on the indicator histogram.
AO = SMA(MP 5) - SMA(MP 34)
AC - Accelerator Oscillator indicator
AO - Awesome Oscillator indicator
SMA - simple moving average
The parameters (MP 5) and (MP 34) are the arithmetic mean of Median Price (MP) of periods 5 and 34, which is determined by the formula:
MP = (H + L) / 2
MP -Median Price, arithmetic mean price maximum and a minimum of a certain period of a traded asset
H - maximum price High
L - minimum price Low
Consequently, the Accelerator Oscillator determines the difference between the arithmetic mean of simple moving averages with period 5 and 3 of the Awesome Oscillator indicator and the value of the same indicator smoothed to period 5.
The application of periods 5 and 34 was originally defined by the Forex Accelerator Oscillator developer. However, traders, who use this indicator in their trading system, talk about frequent erroneous signals. Therefore, those who have experience in trading in financial markets, select the values of the indicator, based on their trading system. Beginner traders should use standard AC indicator values.
Using the Accelerator Oscillator in MetaTrader 4
The Bill Williams Accelerator Oscillator is integrated into almost all trading platforms and programs for technical analysis, including the most popular among traders MetaTrader 4. The oscillator is displayed as a histogram below the price chart. To activate Accelerator Oscillator in Metatrader, go to the main menu and select the Insert field. Click on the Indicators tab from the list of options.
For your convenience, all tools of American analytics are grouped in one folder. The Bill Williams tab contains Alligator, Fractals, and several Oscillators.
To set up the Accelerator Oscillator in Metatrader 4, you need to right-click on the tool field. However, you will not be able to change the basic parameters associated with the oscillator calculation formula. They are sewn into the program code and are not editable.
In the Colors tab, you can select the coloring of the histogram bars and their thickness. By default, they are marked in red and green. In the Levels tab, you can add new horizontal lines that may indicate that the market is overbought or oversold.
In the Visualization field, you may bind the Bill Williams Accelerator Oscillator to 1 or several time frames (by default, it is displayed at all time frames).
Now let us understand how to apply the indicator: Generation of buy or sell signals
The signal to buy occurs at two consecutively growing green columns. In this case, it is recommended to place the pending order several points higher than the previous candle. The same for short positions - you should wait for two consecutive falling red bars and place a pending order a few points below the low of the previous candlestick.
In case the Accelerator Oscillator is below zero, the signal to buy may also be the presence of three consecutive green bars. The same is true for Sell.
One should remember that the Accelerator Oscillator signals are only confirming, and the main signal is always the touch of the first fractal. Only after this touch, you can place orders according to the Accelerator Oscillator signals.
If a signal appears, but the histogram changes color before the pending orders trigger, then make sure to delete this order since it is out of date.
It is important to remember that it is best to use these signals for entry one time at each crossing of the zero line indicator. When we open a trade after crossing the Accelerator Oscillator of the zero line, the next trade can be opened only at the reverse intersection.
Using Bill Williams Accelerator Oscillator as a filter for trades
Changing the color of the Accelerator Oscillator is very important. The green color, regardless of the direction of the indicator, warns against short positions, and red, respectively, against long positions.
To enter the market in the direction of its driving force, you need to consider both the value and the color of the Accelerator Oscillator. At the same time, there are a lot of false signals on the charts below H4.
Quite effective filtering is obtained in intraday trading and when using the Accelerator Oscillator on daily charts.
Accelerator Oscillator Trading Strategy
The Accelerator Oscillator interpretation is as simple as its appearance. It is based on only two things. When the Forex Accelerator Oscillator is above the zero line, we can definitely assume that the speed of price movement in case of an uptrend should continue through the demand side, i.e. the bullish trend will continue. Similarly, in the case of a downtrend, when the
Accelerator Oscillator is below the zero line, we can assume that the prevalence of bears will remain.
Besides, there is a signal of the price increase and a signal of a price decrease. An upward price signal is generated when two consecutive green lines appear on the histogram, provided that both lines are above zero. In turn, the signal for a price decrease of this asset is the situation when two red lines appear on the histogram of the indicator, one after the other, of course, both of them are below zero level.
However, more aggressive traders use the Bill Williams Accelerator Oscillator system differently. It is similar to trading based on overbought and oversold areas in the market, known from trading systems based on the RSI indicator. This strategy is to take a position as opposed to how the indicator histogram is formed. It means that the trader decides to take a long position when the Accelerator Oscillator is below the zero line, and vice versa - when the Accelerator Oscillator is high above the zero line - a short position. In such a trade, however, it is worth waiting for at least one bar of the corresponding color, i.e. red when we intend to open a short position and green when we would like to buy.
Unlike Awesome Oscillator, the crossing of the zero line is not a trading signal itself, but it means changing the pattern, which should be formed to open a position. Positive values are a sign of bullish sentiment in the market.
Similarly, negative values indicate a bearish mood on the market. Williams stressed that with Accelerator Oscillator, you should not buy if you see a red bar, and you should not sell if you see a green bar. You should also keep an eye on both the color of the indicator and whether the values are above or below zero.
Williams himself suggested using the Alligator Indicator as the main indicator. In this case, the Awesome Oscillator and Accelerator Oscillator may work as more sensitive tools to confirm signals from the Alligator.
You may try to work with divergences; although this signal is strong, you should use it in combination with others.
In his strategy, Bill Williams used the Accelerator Oscillator in combination with his other indicators, particularly the Alligator and the fractals. Fractals and Alligator were used to enter the market, while Accelerator Oscillator was used to confirm the trend. So even their author did not enter the market based on the Accelerator Oscillator signal only.
The Accelerator Oscillator indicator, like any other similar tool, has its own advantages as well as disadvantages. Among the main pros of this tool is its ease of use, which makes it perfect for beginners.
Another advantage of this oscillator is its versatility, which allows its use on any time frame and currency pair.
One of the disadvantages of this tool is its dependence on other indicators. If, for example, the Relative Strength Index can be used independently and generates quite reliable signals, then Bill Williams Accelerator Oscillator is significantly inferior to it.
Another disadvantage of the indicator can be considered a smaller number of signals and capabilities than any other oscillator. For example, Stochastics allows you to trade from areas of overbought and oversold or from the intersection of the signal and main lines, and MACD, also, allows you to use divergences.
Despite this, Bill Williams Accelerator Oscillator deserves attention. Often, in combination with other indicators, it provides quite good results.
Bill Williams designed the Accelerator Oscillator to provide as early as possible indications of a possible trend change, rightly suggesting that this would give traders a significant market advantage. This indicator is good at quantifying the market driving force, that is, the factor that makes the price move in one direction or another.
Thus, although the Accelerator Oscillator itself generates rather weak signals, in combination with other indicators it is a very useful tool for technical analysis.