Detrended Price Oscillator

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The Detrended Price Oscillator (DTO) is used in technical analysis to filter small trends in order to recognizer main underlying price cycles. Detrended Price Oscillator could be compared to the PPO (Percentage Price Oscillator), APO (Absolute Price Oscillator) and MACD. The DTO is considered as advanced version of PPO and MACD technical indicators.

The DTO is calculated as a difference between close price and delayed SMA (Simple Moving Average) and the calculation could be split into 3 simple steps:

• Calculate a simple moving average for n periods.
•  Calculate (n / 2 + 1).
• Subtract the moving average value that was (n / 2 + 1) bars ago, from the current closing price:
  
  DPO = Close - Simple moving average [from (n / 2 + 1) bars ago

As was mentioned above the Detrended Priced Oscillator is used in technical analysis to recognize trend cycles. At the same time it used to define overbought and oversold levels and generate buy sell signals. Positive DTO readings reveal that he current stock's (index) price is moving above its delayed moving average and they are considered as a bullish sign. Respectfully negative, DTO readings could be seen when the price is moving below MA and such readings are considered bearish.

There are two main ways of generating DTO signals in technical analysis:

• Buy signal is generated when the DTO moves above zero line after being below it and sell signal is generated when the DTO drops below zero line after being above its level.
• Buy when the DTO crosses (moves above) its resistance line after being in the oversold area and sell when DTO drops blew its support line after being in the overbought area.

Chart 1: Dow Jones Industrials Index (^DJI) - Detrended Price Oscillator

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