Mastering the Detrended Price Oscillator (DPO) for Effective Trading

Long-term cycles are often made up of several shorter cycles. By analyzing these shorter components, you can uncover critical moments in the cycle's progression. The beauty of the DPO lies in its ability to filter out the influence of long-term cycles on price action. To calculate the DPO, you’ll want to select a specific period, removing cycles longer than that period from the price dynamics while keeping the shorter ones. For optimal results, we recommend a period of 21 or less, using half the cycle's length for smoothing.

The overbought and oversold levels are derived from previous price behavior. A solid strategy is to enter a long position when the DPO dips below the oversold level and then crosses back above it. Similarly, if the DPO crosses the zero line from above and then rises, it’s a strong signal to consider a long position. The opposite holds true for short positions—keep an eye on those signals!

Detrended Price Oscillator

Calculation:

where:

• SMA - simple moving average;
• CLOSE - the closing price;
• N - the cycle period (for instance, if N equals 12, then DPO aligns with the DiNapoli Detrend Oscillator).