Introducing Bill Williams
Bill Williams is credited for bringing a lot of useful indicators in the technical analysis world and one of the most commonly used for traders around the world is the Accelerator Oscillator. Such an oscillator, by the time it is applied on a chart, shows green and red lines that are moving above/below the zero line. The idea is that green lines above the zero line represent bullish conditions and we should be interested in buying call options while red lines below the zero line represent bearish conditions and we should buy put options.
The Accelerator Oscillator
However, the accelerator oscillator works very nice in ranging environment as it shows overbought and oversold levels in the sense that one can find out the turning moment using this oscillator. The key is to look, in a bullish trend, for more than one red line to appear, and by the time the oscillator is going into negative territory and green lines appear again its time to BUY underlying assets. The opposite is true as well.
The Accelerator Oscillator is supposed to show as well overbought and oversold levels and it is also used in finding divergences with price. Its lines are showing red and green colors in what is desired to be helpful for traders as green represents bullish conditions while red represents bearish conditions of course.
Finding Oversold and Overbought Levels
In the case you’re looking for overbought and oversold levels the way to go is to zoom out your chart as much as possible and then to apply the oscillator. It can be found on the Metatrader trading platform, the most popular trading platform in the world, in the Insert tab, then the Indicators category and then under the Bill Williams group the first one to appear is the Accelerator indicator.
By zooming out the way mentioned a bit earlier you can find out old levels the oscillator traveled and we can see the extremes. The next step is to right click on the Metatrader window and to choose Edit indicators and there we can add levels. We can add a level on the top of the range and one on the bottom of the range, leaving some piercing in order to have as many entries as possible.
The idea is that every time market is reaching these levels we should sell assets in the overbought territory and buy in the oversold territory while the entry price should be given by the red or green line in the sense that the SELL order should be placed only after the red line appears, as it signals market is shifting from bullish to bearish and BUY order should be traded in oversold territory only after a green line is appearing as market is shifting from bearish to bullish.
Using Divergences With the Accelerator Oscillator
Using divergences with the Accelerator Oscillator cannot be easier as well as a bullish divergence should be considered if price is making two lower lows, the first one being in oversold territory and the second one is failing on the oscillator side. By the time the first green line on the oscillator is appearing, we can assume we have our entry price at the close of the candle and can place BUY trade. Beware of the expiration date that should be chosen as it depends very much on the time frame the indicator is being applied.
One other way to trade and not only using the Accelerator Oscillator is to look at the zero level as a continuation pattern, but here I would have something more to add: try to avoid period of consolidation and ranges as it tends to give mixed signals when market is not trending. In order to avoid that, look at lower time frames and even the five minutes chart can show good places for buying a short-term expiration date option like hourly or even lower.
Tips and Tricks
The idea is that price moving to the downside in aggressive trends is being met with the oscillator printing only red lines and by the time it is crossing the zero level and from the top to that moment only red lines are printed, we can safely assume that the trend is strong and selling assets expecting trend continuation is recommended. On the other hand, if the market is failing to have a straight red series from the top, we should assume bulls are still around and we should avoid trading the continuation pattern.
The opposite is true as well when the market is trying to carve a bottom and of course that in a green sequence the option to be traded is a BUY contract / CALL option.
The videos related to this article show you where the Bill Williams oscillator is and how to apply it on a chart and interpret it as, like mentioned above, overbought/oversold territory, divergences and continuation patterns can be traded with this oscillator.