It's a well-known market maxim that the trend is your friend. It follows that the earlier you can successfully identify a trend, the more profit you'll be able to squeeze out of it. To this end, an early warning system would be a useful tool. The Accelerator Oscillator is designed to be an indicator that attempts to provide early signals of change in the force driving the market.
The Accelerator Oscillator is one of several popular indicators developed by the well-known technical analyst Bill Williams. Williams maintained that the direction of momentum will always change before the price, so that looking at momentum instead of just the price gives a timing advantage. The Acceleration Indicator seeks to go one step further and detect early changes in momentum – that is, when momentum is accelerating or decelerating.
So, Williams contended that before the trend in the price changes, the direction of momentum will change and that even before this, there will be an acceleration change in momentum. The Accelerator Indicator (also known as the Acceleration/Deceleration Indicator) was the tool he developed to gauge this change. Let's look at the calculation method to see how it works.
The Acceleration Oscillator is derived from the Awesome Oscillator (AO), another of Bill Williams' indicators. The Awesome Oscillator compares a 5-period time frame to a 34-period time frame, in order to gain an insight into market momentum. Specifically, the AO is the 34-period simple moving average (SMA) of the median price subtracted from the 5-period SMA of the median price.
The Acceleration Oscillator is derived from the Awesome Oscillator, by subtracting a 5-period SMA of the AO from the AO. This is summarised by the following equation:
Acceleration Oscillator = AO - SMA5(AO)
Naturally, keeping tabs of the value of the Acceleration Oscillator, as a derivative of another indicator that itself uses multiple moving averages, would be irksome in the extreme by way of manual calculations. The good news is, of course, that manual calculations are not needed, because MetaTrader 4 will take care of it all for you. Let's now take a look at how the Accelerator Oscillator features in MetaTrader 4.
Using the Acceleration Oscillator in MetaTrader 4 is straightforward as it comes as one of the standard indicators bundled with the platform. The standard indicators in MetaTrader 4 are sorted into the four broad categories of Trend, Oscillators, Volumes, and Bill Williams. Although it is an oscillator, the Accelerator Oscillator is classified in MT4 as being a Bill Williams indicator first and foremost. Therefore, it's in the Bill Williams folder that you'll find it. In fact, it is the first listed item in that folder within MT4's Navigator as shown in the image below:
Double-clicking on Accelerator Oscillator launches a dialogue window as shown above. As you can see, there isn't a great deal for you to configure there. The main choice is simply the look and feel of the histogram, with a choice of colours and line thickness.
The default colours are:
You can see how the indicator appears, with defaults applied, in the image below of an hourly GBP/USD chart. The Accelerator Oscillator Forex chart appears as a separate histogram beneath the main chart.
Notice how the sharpest rise in the price on the chart corresponds to successive green bars above the zero line of the Accelerator Oscillator? Also, pay attention to how the uptrend continues after this point. In the middle of the chart, when the price first begins to decline, we get successive red bars in the Accelerator Oscillator below the zero line. See how a general downtrend persists after this point.
Some of the key trading rules for using the Accelerator Indicator revolve around just these kinds of patterns. Let's look at using the Accelerator Oscillator trading strategy in a bit more detail.
In Williams' words, "the zero line is the place where the momentum is balanced with the acceleration". What does this mean? Well, when the indicator is above the zero line, meaning it is easier for acceleration to continue to increase. Conversely, when the indicator is below zero, it is easier for deceleration to increase.
Unlike the Awesome Indicator, crossing the zero line is not a trading signal in itself, but it does mean a change in the pattern we need to see in order to be confident of placing a trade.
The simplest use of the indicator is really very easy to follow. Positive values are a sign of bullishness in the market. Similarly, negative values suggest bearishness in the market. Williams stressed that with the Accelerator Oscillator, you must not buy if you are seeing a red bar and you must not sell if you are seeing a green bar. You also need to keep an eye on both the colour of the indicator and whether the values are above or below zero.
Here is a simple summary of the rules for the Accelerator Oscillator strategy, as originally instructed by Bill Williams:
If you are buying above zero or selling below zero, the momentum is with you. You only need two successive bars of agreement to open a trade. That is, two green columns in a row above zero is a buy signal. Two red columns in a row below the zero line is a sell signal.
If you are buying with the indicator below the zero line, or selling above the zero line, the momentum is against you. 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. Likewise, three consecutive green bars are required to buy below the zero line.
Williams himself suggested using the Alligator Indicator as the biggest arbiter of whether to trade or not. The Awesome Oscillator and the Accelerator Oscillator can then operate as more sensitive tools for providing specific signals within the big picture indication painted by the Alligator Indicator.
Of course, your options for improving the performance of this indicator aren't restricted to combinations with other Bill Williams indicators. Potentially any indicator may offer a helping hand to your Accelerator Oscillator strategy, so it's worth gaining access to as wide selection as you can. If you are looking to maximise your options in this area, you'll likely benefit from upgrading to MetaTrader 4 Supreme Edition. MT4SE is a custom plug-in, compiled and developed by professionals, to offer a much more comprehensive suite of trading tools and indicators. It's available as a free download, so why not give it a try?
Bill Williams designed the Accelerator Oscillator to provide the earliest indications possible to changes in the trend, and he claimed it gives traders a significant advantage in the market. Of course, the only way to build any true confidence, not to mention proficiency, in a strategy is for each individual to give it a try. Our Demo Trading Account allows you to do this with true market prices, but without risking any money while you are still building your confidence up.
We hope you have found this introduction to the Accelerator Indicator useful. As well as developing a selection of popular indicators, Bill Williams was also a dispenser of general pearls of wisdom for trading the markets. He was keen to stress that indicators are just half of the story and that using the right tools needs to be backed up with the right attitude. If you're interested in reading more on this, why not take a look at our article on Trading Psychology.