Detrended Price Oscillator (DPO)

What is it?

The Detrended Price Oscillator (DPO) is a lagging, oscillating cycle indicator that was developed to identify cyclical shifts in equities by removing the overarching trend from the price action, hence the name Detrended Price Oscillator. DPO identifies cycles in the underlying price action by comparing a past price to a displaced simple moving average (SMA). The result is an oscillator that moves above and below a zero line as prices moves above and below the displaced SMA. This makes it easier to identify the cycle length, as well as the overbought or oversold conditions.

How is it calculated?

In essence, the DPO calculates the difference between the underlying price of the equity, and a displaced simple moving average (SMA) of that price. Thus, the DPO is calculated in three steps:

First, calculate the simple moving average (SMA), which is the ( Sum of price for n periods ) / n where n is the period for the DPO.

Now shift the SMA back by half of n plus 1 period using the formula: ( n / 2 ) + 1.

Finally, subtract the price from the displaced SMA.

This leaves us with the formula: SMA: DPO = Price – SMA of ( ( n / 2 ) + 1 ) periods ago

For better performance, the period for the DPO, n, should be adjusted until it matches the length of a complete cycle.

How is it used?

It is important to note that unlike most other oscillators, the DPO is essentially a lagging indicator that can projected forward. In other words, the actual cycle that the DPO plots correlates to the price of ( n / 2 ) + 1 periods ago and not to the current price. Once the cycle length is identified, it can be projected forward to indicate the possible points at which the price action can be expected to turn. Thus, the cycle length, which can be identified by the rhythmic repetition of highs and lows traced by the DPO, is of importance.

The DPO is best used as an early warning system for a possible trend reversal, but should be used with other indicators, which would act to confirm the warning.

Oscillating Indicators

Stochastic Oscillator
Stochastic Oscillator

Oscillators are indicators that technicians use to analyze securities or equities that are not trending but trading in a range. Thus, oscillators are most beneficial when a security is in a horizontal trading pattern. Oscillators move higher and lower between extreme reading that determine overbought or oversold conditions. These overbought or oversold conditions indicate probable turning points in price movement and can be used as potential entry or exit points.

Popular oscillating indicators include the Stochastic Oscillator, RSI, CCI, and Williams %R. ...

Related Indicators:

Moving Averages (MAs)

Moving Average

A Moving Average (MA) is a very versatile and widely used trend indicator that attempts to remove market 'noise' by plotting an average of the recent price bars. A side effect of the process of averaging means that the MA lags price action. Numerous adaptations of the MA have been developed in an attempt to reduce price lag, resulting in different types of MAs, such as the Exponential Moving Average (EMA), the Smoothed Moving Average (SMMA), the Linear Weighted Moving Average (LWMA), the Variable Moving Average (VMA) and the Volume Adjusted Moving Average (VAMA). However, none of these adaptations can be ...

Wealth Warning

Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.

Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!