Detrended Price Oscillator (DPO)
Detrended Price Oscillator (DPO) is one of forex technical indicator often used in forex technical analysis. Detrended Price Oscillator (DPO) is another variation of a moving average. It gives a tool of seeing basic cycles which are not so clear when the moving average is viewed in its primary phase by well-hiding the main cycles.
The moving average line is drawn as a straight, horizontal basis line on the Detrend chart. Afterwards price bars are put along this line depending on their correspondence to the moving average line.
When the Detrended Price Oscillator is above the zero line, it means that price is above its moving average, a bullish sign. Similarly, when the Detrended Price Oscillator is below the zero line, it means that price is below its moving average, a bearish sign.
The Detrended Price Oscillator (DPO), described in Steven Achelis’ book “Technical Analysis from A-Z”, attempts to eliminate the trend in prices by filtering out cycles longer than its moving average. It accomplishes this by comparing the current price to a moving of price (n/2)+1 periods ago. By detrending prices, shorter-term cycles are more easily identified allowing for a quicker determination of potential overbought and oversold levels.
There are two interpretations of buy and sell signals:
1. When Detrended Price Oscillator crosses above zero line.
2. When Detrended Price Oscillator is in a confirmed oversold area, as referenced by prior lows of the oscillator, and the Detrended Price Oscillator and price both break the downward resistance trendline.
1. When Detrended Price Oscillator crosses below zero line.
2. When Detrended Price Oscillator is in a confirmed overbought area, as referenced by prior highs of the oscillator, and the Detrended Price Oscillator and price both break the upward supporting trendline.
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