Awesome oscillator
The difference between a 5-period and 34-period SMA of the midpoint price ((high+low)/2), used to gauge momentum shifts independent of the closing price.
What the numbers mean
The two periods are simple moving averages of each bar's midpoint, (high+low)/2, rather than the close; the histogram is the fast average minus the slow one. Using midpoints instead of closes means the reading is unaffected by where a bar happened to settle.
- 5 — the fast SMA of each bar's midpoint, (high + low) / 2
- 34 — the slow SMA of the same midpoints
- Midpoints rather than closes mean the reading ignores where a bar happened to settle
- No fixed extremes — the scale is in price units and unbounded
How it is used
Read for zero-line crossings, for the 'twin peaks' setup (two histogram peaks on the same side of zero with the second lower), and for the saucer — a colour change in the histogram while it stays on one side of zero.
- Crossing zero → the 5 and 34 midpoint averages have swapped order
- Twin peaks → two histogram peaks on the same side of zero, the second lower
- Saucer → a colour change in the histogram without crossing zero
How it relates to everything else
AO is a MACD built from simple averages of midpoints rather than exponential averages of closes, and it belongs to Bill Williams' system alongside the Alligator and Acceleration/Deceleration — the Alligator supplies trend state, AO supplies momentum, AC supplies the change in momentum.
- Alligator + AO + AC → the three parts of Williams' system
- Same structure as MACD, with SMAs and midpoints instead of EMAs and closes
- AC is AO minus its own 5-period average
What to watch for
It measures a fixed 5-versus-34 relationship and nothing else, so it says little on timeframes that do not match that rhythm. Like MACD it is unbounded, so its extremes are relative to the security's own history.