The Detrended Price Oscillator (DPO) is an indicator that essentially works to average out the price of a stock over time, sequestering short-term trends. Its main function is to show the highs and lows of an average cycle, and determine how long that typically lasts. Its function is not a trigger for action, but a long-term planning tool for an investment or a portfolio.
A STEP-BY-STEP GUIDE TO THE DPO
A DPO is used for any stock we’re looking to get a historical basis for and is analysed like so.
- Pick a number of price cycles of our stock for our DPO to analyse, usually between 20 and 30.
- The DPO calculates the simple moving average of our stock.
- The DPO looks at a price from a particular cycle, one that was 1 plus half the maximum number of cycles ago. If 30 cycles were analysed, this would be cycle number 16.
- Subtract the value of the simple moving average from the value we found in step 3.
Looking at the combination of averages and anomalous areas, and finding the differences between them, we reduce or eliminate any major trends, and are able to identify cycles.
DPOs AND TRADE TIMING
The main use of this indicator is to identify what is a trend and what is the natural high and low cycle of an investment. There are two substantial benefits that this can have. In a short trade, being familiar with price cycles separate from trends allows you to identify what is, on average, the best time to buy and sell. In long-term trades, a look at twenty or thirty cycles indicates when prices vary and normalize, because “not all the peaks and troughs on the DPO will move to the same level.”
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