The Detrended Price Oscillator (DPO) is an indicator that measures the difference between the past price and a moving average. This indicator is designed to remove the trend from the price, thereby helping the traders in identifying market cycles quickly.
DPO smoothes out the price movements in order to show the broader price trends of any currency. Remember that DPO is not a momentum oscillator, but is used to identify the high/low market cycles. This indicator also estimates the length of a price cycle. The detrended oscillator is based on a displaced moving average, and it oscillates above and below the zero-line.
The DPO is positive when it goes above the zero-line, and it is negative when it goes below the zero-line. A series of short term cycles make up the long term cycles. Traders use the short-term components of a long-term cycle to identify its major turning points.
DPO = Close (n/2 + 1 Periods ago) – n Period SMA
Installing Detrended Price Oscillator In MT4 (Step-by-step process)
This indicator is not available in the MT4 Terminal by default, but it is available on the internet. Follow the link below to download the indicator.
Download the zip file from the link and extract the file.
Paste it to your MT4 directory/MQL4
Make sure to paste it in the ‘indicators’ folder.
Restart your MT4 Terminal.
Click on the Insert > Indicator > Custom > Detrended Price Oscillator (DPO)
As you can see in the image below, we have applied the DPO indicator on to the CHF/JPY chart.
Detrended Oscillator – Trading Strategies
DPO Major Reversal + S&R Strategy
As you know by now, DPO helps us to identify the major price cycles, and it works on all the timeframes. In this strategy, let’s discuss how to support your trading decisions by using the DPO indicator.
The strategy is pretty straight forward. When the price is at major support/resistance levels, see if the DPO indicator is below/above the zero-line giving a sharp reversal. If yes, that can be considered as a strong buy/sell signal for us.
Buy/Sell Signals On Daily Chart
Chartists often believe that each timeframe is a completely different universe altogether. They move differently than the timeframe lower or higher to them. If a trader can understand the working of at least two timeframes completely, they can easily take their trading game to a whole new level.
In the chart below, we have marked the market cycles with different colours. Most of the currency pairs often complete their market cycle within the span of 2 to 3 months. As you can see in the below NZD/CHF chart, the price hits the bottom and top approximately in every 2 to 2.5 months.
Upon noticing the cycles, look for the buy signals which aligns with the major support areas on this timeframe and look for the sell signals which aligns with the major resistance areas.
As you can notice in the above chart, every new price cycle starts as the price hits the major support/resistance levels. The good thing about looking at the higher timeframe is that you will be able to notice very fewer spikes. This makes it easier for traders to trade. With enough practice, you can easily predict the market cycles as most of the currency pairs never move in one direction for more extended periods. Most of the banks, hedge funds and professional traders use this strategy to trade the market. We also have marked a few of the buy/sell signals in the above chart.
Buy/Sell Signals On 4-Hour Chart
In the below chart, we have applied the DPO indicator on to the 4H or 240-minutes chart. As discussed, every timeframe is unique and moves differently than the other timeframes. Here, on the 4H-chart, the market often takes 15-18 days to complete one cycle.
As you can see, we have marked a few of the buy/sell opportunities identified by the DPO indicator.
For this strategy to work more accurately, we suggest you take the trade only when the price reaches the major support/resistance areas, and wait for the DPO’s reversal to activate your trade.
DPO’s and The Trend line
In this strategy, we have drawn the trend lines on to the DPO indicator to identify the buy/sell signals. When the DPO indicator moves below the zero-line, it means the price is at oversold territory. The further the indicator goes below the zero-line it is considered as an oversold area, and a reversal is expected.
In the below chart, DPO is below the zero-line, which means the market is in a downtrend. The trend line that is drawn on the DPO indicator acts as a resistance line. As both price and DPO indicator break the trend line, it can be considered as a buy signal. Use the recent low of the price to place your stop-loss orders. When the DPO indicator crosses the zero line and goes into the buyer territory, wait for the reversal and close your trade.
To get the sell signals, our indicator should be in the buyer’s territory. The further the indicator goes above the zero-line, the higher the probability of trend reversal.
As you can see in the below chart, the DPO indicator was above the zero-line. Then the price and the indicator broke the trend line. This is a potential sell signal for us. Always close your trade when the DPO gives a reversal in the seller territory. Use this strategy only for intraday trading and this works best in the trending market.
Detrended Price Oscillator is not a momentum indicator, but it shows the difference between the past price and a simple moving average. This indicator is designed to identify the market cycles with its peaks and troughs. DPO can also be used to identify the price extremes. Try using this indicator in your daily trading activities and let us know the results in the comments below. Happy Trading!