- 1 Detrended Price Oscillator specification
- 2 Reading the Detrended Price Oscillator
- 3 Summary
Detrended Price Oscillator specification
The indicator called Detrended Price Oscillator or DPO in short, highlights lows and highs on the price chart. It helps in predicting future peaks and troughs based upon a historical cycle. Thus, it is not a momentum indicator as opposed to other oscillators like MACD or Stochastic.
The DPO measures the interval between lows and highs in time. Typically, a period of 20 or 30 candles is used. If, for example, two peaks were noted two months apart in the past, it can be predicted the subsequent one will be in two months from the last one. This piece of information can be used as a signal of selling opportunity. The same way the distance between two troughs in the past can be used to estimate the future buying opportunity.
How to add the Detrended Price Oscillator to the chart at Olymp Trade
Log in to your trading account on the Olymp Trade platform. Choose the asset for the session and set the type of the chart. Then, click on the technical analysis tools icon. You will find the Detrended Price Oscillator on the list of the available indicators.
The Detrended Price Oscillator will be displayed in a separate window beneath the price chart.
Detrended Price Oscillator formula
The formula to calculate the DPO looks as follows:
DPO = Price from X/2 + 1 periods ago – X period SMA
SMA is a Simple Moving Average and X indicates how many periods were taken for a retrospect period.
To calculate the DPO you must first decide on the retrospect period. It can be, for example, 20 periods. Then, determine the closing price from the X/2 + 1 period back. For 20 periods, it will be 11. Calculate the Simple Moving Average for the latest X periods. It will be 20 in our example. Now, deduct the value of the SMA from the closing price X/2 + 1 period ago and you get the value of the DPO.
Reading the Detrended Price Oscillator
As I mentioned before, the DPO is used to predict future lows and highs. To do this, you need to check what was the distance between peaks or troughs in the past. You can also measure the length of the trend by checking how far was the peak and the trough from each other.
The oscillator is positive when the price from X/2 + 1 period ago is over the SMA. The indicator is negative when the price from X/2 + 1 period ago is beneath the SMA line.
Using the Detrended Price Oscillator at Olymp Trade
Below you will find the chart for Bitcoin. You can notice that the price forms tops every 40 to 60 minutes. You should look for opportunities to enter a short position 40 to 60 minutes from the last peak.
In the example below for the EURUSD chart, the price forms bottoms every 45 to 60 minutes. Search for the opportunity to enter a long trade after 45 to 60 minutes from the last bottom.
Another way of using the DPO is to look for divergences. When the price goes in the opposite direction to the oscillator, you should look for a possible change in the main trend.
What is the distinction between the Detrended Price Oscillator and the Commodity Channel Index?
The DPO, as well as CCI, catches the cycles in the price movements. The difference lies in the way they capture these cycles. The DPO helps to determine the time between the tops, the bottoms, or the tops and bottoms. While the CCI oscillates between the values -100 and +100 and the breakouts from these levels gives a sign of something important like the beginning of a new trend. So it focuses on the start and end of the cycle and not the time that passes between them.
Disadvantages of utilizing the Detrended Price Oscillator
The DPO gives information about the length of the cycle. It does not, however, produce trading signals. It is rather used in addition to other tools. Moreover, the cycles may differ in the future. They can be shorter or longer than they were in the past Thus, it is used to estimate potential entry points.
The DPO does not tell what is the direction of the trend. A trader has to use extra tools to determine whether to enter a sell or buy position.
Also, the levels of the tops or bottoms are not necessarily equal each time. You need to analyze the chart carefully to catch significant movements. The DPO will more or less tell you when to expect trend reversal. For identifying the right moment to open a transaction you might use price action or other tools such as RSI or Stochastic.
The Detrended Price Oscillator helps in identifying the price cycles. You can predict the future peaks and troughs based on historical data. Nevertheless, it does not guarantee what will happen in the future, so it is a good idea to use other indicators together with the DPO.
Olymp Trade has a free demo account in its offer. I recommend using it to get to know the indicator. Trade with it in a risk-free environment before you invest in your real account. Keep in mind that the DPO is far from a risk-free strategy. You’re always going to be facing risks when dealing with the financial market, and this one is no different. Be prepared to deal with losses accordingly.
I would be happy to hear what you think about the Detrended Price Oscillator. Share your observations in the comments section below.
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