5 min read
The Detrended Price Oscillator (DPO) is a technical analysis tool designed to remove the influence of the general trend from price action and make it easier to identify cycles. Unlike the Stochastic and the MACD, the DPO is not a momentum indicator. It is used to identify the high and low points within the cycle and to estimate its length. Read the full article to find out how to apply it in trading!
What is DPO?
As can be seen from the name of the indicator itself, the DPO is used to remove the influence of a long-term trend from current prices. But why should a trader do it? Should not it follow the trend? Sometimes it is easier to estimate the longevity of a trend and predict an imminent reversal when price movements linked to the trend are completely removed from the chart.
The price chart and the DPO have corresponding highs and lows
What you get at the end is a curve, quite similar in its form to the real price chart. The most obvious difference between the two is the lack of an important trend on the DPO. To use the indicator correctly it is important to understand that the Detrended Price Oscillator is based on the use of a moving average, moving several periods to the left. The indicator will compare past prices with a moving average.
How to set it up?
The setting of the Detrended Price Oscillator is simple. To do this you must:
- Click on the "Indicators" button at the bottom left of the screen,
2. Select "DPO" from the list of available options,
3. Without changing the default settings and confirm with the "Apply" button.
The indicator is ready to be used!
How to use it in trading?
As mentioned above, the Detrended Price Oscillator measures the difference between the past price and the moving average. The horizontal line corresponds to the moved moving average. Thus, the DPO is positive when the price is above average and negative when the price is lower.
The indicator is particularly useful when trading on shorter time intervals. Not being interested in long-term trading, you may want to exclude long-lasting trends from your estimates and consider only shorter fluctuations. For this purpose there is no better tool than the DPO. If this is your case, take a look at the DPO before opening the transaction and you will know to what extent the prevailing trend is responsible for price changes.
The DPO can also be used to estimate the average duration of the cycle. For example, when trading with CFDs on a given stock, you can know the amount of time needed to earn the price and then start going down. Financial markets have a tendency to repeat themselves. The periods of growth, therefore, alternate with periods of depression. Using the DPO you can be prepared for a next trend inversion. Calculates the distance between peaks and nearby drops to estimate the average cycle time. Consider using it later when the current cycle is about to end.
The indicator is best used as a support tool and can be combined with a trend following indicator (MA, Alligator), with MACD or ATR.
This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that these movements or levels may re-appear in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.
GENERAL INFORMATION ON RISKS:
CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 73% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.
Source: IQOption blog 2018-12-07 11:45:05