Bill Williams, a well-known technical analyst, developed 5 measurements for technical analysis, the third of which is used to determine accelerator or decelerator of the driving force. Awesome Oscillator enable traders to determine the momentum, but for interpreting its force more accurately, Accelerator Oscillator is required accordingly.
Acceleration/Deceleration Technical Indicator (AC) measures acceleration and deceleration of the current driving force, gauging an acceleration change in momentum. The direction of this indicator will always change before the price, meaning that looking at the indicator’s momentum instead of just the price gives a timing advantage. The Acceleration Indicator is seeking to go one step further and detect early changes in momentum – that is, when momentum is accelerating or decelerating.
• Calculating the Acceleration Oscillator
The Acceleration Oscillator actually comes from the Awesome Oscillator (AO), one of the indicators from Bill Williams’. The Awesome Oscillator compares a 5-period time frame to a 34-period time frame, with an aim to gain an insight into market momentum:
AO = SMA (MEDIAN PRICE, 5) – SMA (MEDIAN PRICE, 34)
Where the AO is the 34-period simple moving average (SMA) of the median price subtracted from the 5-period SMA of the median price.
Then the Acceleration Oscillator is derived from the Awesome Oscillator, by subtracting a 5-period SMA of the AO from the AO:
Acceleration Oscillator = AO – SMA5(AO)
• Trading Strategy
As shown in the Figure 1 below, the default colours for a up-value and down-value are in green and red respectively.
The nought line is basically the spot where the driving force is at balance with the acceleration. It’s meaning that when the indicator is above the zero line, it is easier for acceleration to continue to increase. Conversely, when the indicator is below zero, it is easier for deceleration to increase. However, unlike the Awesome Oscillator, crossing the zero line is not a trading signal for investors in itself, but it gives a change in the pattern that will bolster optimism on placing a trade.In addition, Positive values are a sign of bullishness in the market, while negative values indicate bearishness in the market. According to saying from Bill Williams, you must not buy if you are seeing a red bar and you must not sell if you are seeing a green bar. Meanwhile, you also need to keep an eye on both the colour of the indicator and whether the values are above or below zero, like what has been mentioned above.Here is a brief summary of the trading rules, which are originally instructed by Bill Williams:If you are buying above zero or selling below zero, that means you follow the momentum. All you need to do is waiting for two successive bars of agreement to open a trade. That is, two green columns in a row above zero is a buy signal, while two red columns in a row below the zero line is a sell signal.If you are buying below the zero line, or selling above the zero line of the indicator, the momentum is against what you have traded. This requires extra confirmation and consequently you should look for three successive bars to open a trade. That is, three consecutive red bars are required to sell above the zero line. Similarly, three consecutive green bars are required to buy below the zero line.