As traders, we know that price is the last piece of the puzzle to move. Before prices shift, the market's driving force takes a turn. The acceleration of this driving force needs to slow down and hit zero before it starts to gain momentum in the opposite direction. This is where the Accelerator Oscillator (AC) comes into play.
The Acceleration/Deceleration indicator helps us measure that momentum. It changes direction before the driving force does, giving us a heads-up before prices shift. Understanding this can give you a significant edge in your trading strategy.
The zero line is where the driving force balances out with acceleration. If the AC is above zero, it’s usually easier for the acceleration to keep pushing prices up, and vice versa when it dips below zero. Unlike the Awesome Oscillator, crossing the zero line isn’t a signal to trade. Instead, focus on the color changes of the histogram. A crucial rule to remember: don’t buy when the current column is red, and don’t sell when it’s green.
When you’re ready to enter the market, align your trades with the direction of the driving force. If the AC is above zero, it’s a good time to buy; if it’s below, consider selling. You’ll want to see two green columns for a buy signal (or two red for a sell). If the driving force is against your intended position (like the AC being below zero for a buy), you’ll need confirmation — which means looking for three consecutive columns in the same color. So for a short position, aim for three red columns above zero, and for a long position, three green columns below zero.
How to Calculate the AC:
The AC bar chart is derived from the difference between the 5 and 34 period values of the driving force bar chart and the 5-period simple moving average (SMA) calculated from that chart.
MEDIAN PRICE = (HIGH + LOW) / 2
AO = SMA (MEDIAN PRICE, 5) - SMA (MEDIAN PRICE, 34)
AC = AO - SMA (AO, 5)
Where:
- MEDIAN PRICE - the median price;
- HIGH - the highest price of the bar;
- LOW - the lowest price of the bar;
- SMA - Simple Moving Average;
- AO - Awesome Oscillator.
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