The Awesome Oscillator (AO), developed by Bill Williams, is a momentum indicator that shows the difference between a 5-period and 34-period simple moving average of the bar's midpoints. In the Katana trading system, it serves as the crucial momentum confirmation filter.
How AO Works
AO = SMA(Median Price, 5) - SMA(Median Price, 34)
Where Median Price = (High + Low) / 2
The result is displayed as a histogram: green bars when the current value is higher than previous (momentum increasing), red bars when lower (momentum decreasing).
Key Signals
Zero Line Cross
When AO crosses above zero, overall momentum is bullish. Below zero = bearish. In Katana, we use this as the primary confirmation: only take buy signals when AO is above zero, sells when below.
Twin Peaks (Divergence)
Two peaks on the same side of zero with a pullback between them. Bullish twin peaks: two lows below zero where the second is higher (less negative). Bearish: two highs above zero where the second is lower.
Saucer Signal
Three consecutive bars above zero where the middle bar is lower (red) and the third bar is higher (green) than the second. Indicates a brief momentum pause followed by continuation.
AO in the Katana System
Within Katana, AO serves specifically as a filter:
- MA5/MA20 gives a buy crossover → check AO is green/above zero → proceed
- MA5/MA20 gives a buy crossover → AO is red/below zero → skip this signal
This simple filter eliminates many false crossover signals that occur during ranging or counter-trend conditions.
Common Mistakes
- Using AO alone without trend confirmation (it's a filter, not a standalone signal)
- Trading every color change (too many signals, most are noise)
- Ignoring the zero line context
Conclusion
The Awesome Oscillator is a powerful momentum tool that, when combined with MA crossovers and Williams Fractals, creates the complete Katana trading system.