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Forex Indicator DPO

The Detrended Price Oscillator (DPO) is an indicator designed to remove trend from price and make it easier to identify cycles. DPO does not extend to the last date because it is based on a displaced moving average. However, alignment with the most recent is not an issue because DPO is not a momentum oscillator. Instead, DPO is used to identify cycles highs/lows and estimate cycle length.

The moving average displacement actually centers the moving average. Consider a 20-day simple moving average offset 11 days to the left. There are 10 days in front of the moving average, 1 day at the moving average and 9 days behind the moving average. In reality, this moving average is in the middle of its look-back period. Roughly half the prices used in the calculation are to the right and half are to the left. Chart 1 shows the S&P 500 ETF (SPY) with a 20-day SMA (green dotted line) and a 20-day SMA offset 11 days (pink line). The ending values are the same (106.84), but the pink moving average ends on October 27th and the green moving average ends on November 11th, which is the last date on the chart. Also notice how the “centered” moving average (pink) more closely follows the actual price plot.

The Detrended Price Oscillator shows the difference between a past price and a simple moving average. In contrast to other price oscillators, DPO is not a momentum indicator. Instead, it is simply designed to identify cycles with its peaks and troughs. Cycles can be estimated by counting the periods between peaks or troughs. Users can experiment with shorter and longer DPO settings to find the best fit.

 

 

Trading spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. 

 

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