EDUCATION: Awesome Oscillator

Happy New Year, dear subscribers!
Today we will consider the easy understandable but very effective technical analysis tool - the Awesome Oscillator (AO) Indicator and the most common strategy using it.

Definition
AO is calculated as the difference between the 5 and 34 perid SMAs of the median price. The median price is a high plus low price divided by 2. It is the one of the momentum oscillators which measure the price changes. As we can see on the chart the red bars of AO is the decreasing value bars and the green means the increasing value. When the AO value is above the centraline the bullish pressure is dominant, if below - the bearish pressure is higher than bullish.

The strategy
First of all you should define the trend direction. We will use the 200 SMA for this purpose. If the price is above the 200 SMA the long position should be executed, in opposite case - short.
The another one condition for long is the crossing of the AO and the zero-line from from bearish to bullish dominance. Correspondingly, the second short condition is when the AO crossed the zero-line from up to down.
This indicator have no strict exit condition, we should combine it with other indicators or use the fixed take profit percent. You can define this percent in the best way using the backtest.

There is no only one strategy with the AO. In one of the next articles we will consider other strategies.