How to Trade with the Accelerator Oscillator
It's a well-known market maxim that the trend is your friend and the earlier you can successfully identify a trend, the more potentially advantageous it will be to you. To this end, an early warning system of a shift in market direction would be an incredibly useful tool to a trader.
The Accelerator Oscillator is designed to be an indicator that attempts to provide early signals of change in the force driving the market. In this article, we will explore the Accelerator Oscillator indicator, demonstrating how to use it, sharing an Accelerator Oscillator strategy and much more!
Table of Contents
Accelerator Oscillator: An Introduction
The Accelerator Oscillator is one of several popular indicators developed by the well-known technical analyst Bill Williams, which explains why you may sometimes hear it referred to as the ‘Bill Williams Accelerator Oscillator’.
Williams maintained that the direction of momentum will always change before the price, so that, by looking at momentum as well as price, traders can gain an advantage. The Accelerator 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 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 Oscillator or the Acceleration Deceleration Oscillator) was the tool he developed to gauge this change.
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Accelerator Oscillator: Formula
The Accelerator Oscillator Forex indicator 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 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 calculated from the Awesome Oscillator by subtracting a 5-period SMA of the AO from the AO.
|AO - SMA5(AO)|
Naturally, manually calculating the value of the Acceleration Oscillator, a derivative of another indicator that itself uses multiple moving averages, would be incredibly disagreeable. Fortunately, the manual calculation of the Accelerator Oscillator formula is not necessarily, as both MetaTrader 4 (MT4) and MetaTrader 5 (MT5) will take care of it for you.
How to Use the Accelerator Oscillator in MetaTrader
Using the Accelerator Indicator in both MT4 and MT5 is straightforward, as it comes as one of the standard indicators bundled with the platform.
The standard indicators in both versions of MetaTrader are sorted into four broad categories of: Trend, Oscillators, Volumes, and Bill Williams. Although it is an oscillator, the Accelerator Oscillator is classified in both MT4 and MT5 as being a Bill Williams indicator first and foremost. Therefore, it can be found in the Bill Williams folder, 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:
- Green for an up-value – i.e. increasing acceleration
- Red for a down-value – i.e. increasing deceleration
You can see how the Accelerator indicator appears, with defaults applied, in the image featured 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 drops in the price on the chart correspond to successive red bars below the zero line of the Acceleration Deceleration Oscillator? Also, pay attention to how the downtrend continues after this point. Some of the key trading rules for using the Accelerator Indicator revolve around just these kinds of patterns.
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Trading with the Acceleration Deceleration Oscillator
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, 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 Oscillator, crossing the zero line is not a trading signal in itself, but the simplest use of the indicator remains straightforward to follow. Positive values are a sign of bullishness in the market, whereas negative values suggest bearishness in the market.
Williams stressed that with the Accelerator Oscillator, you should not buy if you are seeing a red bar, and you should not sell if you are seeing a green bar. As well as keeping an eye on the colour of the indicator, you need to look for whether the values are above or below zero.
However, it is important to remember that this is not an exact science. Technical indicators can be useful tools in helping predict where the market might move next, but they are not 100% accurate and should be used in conjunction with an overall risk management strategy.
Accelerator Oscillator: Trading Strategy
Here is a simple summary of the rules for an Accelerator Oscillator strategy, as originally instructed by its creator, Bill Williams. He suggested that, if you are buying above zero or selling below zero, the momentum is with you.
Therefore, a possible Accelerator Oscillator strategy could interpret two green columns in a row above zero as a buy signal, and two red columns in a row below the zero line as a sell signal.
It follows that if you are buying with the indicator below the zero line, or selling above the zero line, the momentum is against you. Therefore, in this scenario, you might want to look for additional confirmation before entering a trade. For example, you could look for three consecutive red bars before selling above the zero line and three consecutive green bars before buying below the zero line.
Williams himself suggested using the Alligator Indicator as the biggest determiner of whether to trade or not. The Awesome Oscillator or the Accelerator Oscillator can potentially then operate to provide specific signals within the big picture 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 a selection as you can. If you are aiming to maximise your options in this area, you'll likely benefit from upgrading to the MetaTrader Supreme Edition (MTSE). MTSE is a custom plugin for both MT4 and MT5 which is designed to offer a comprehensive suite of trading tools and indicators.
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Bill Williams designed the Accelerator Oscillator to provide the earliest indications possible to changes in the trend, and he claimed that it can give traders a significant advantage in the market.
We hope that 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, you might want to take a look at our article about Trading Psychology?
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