Detrended Price Oscillator (DPO)

The Detrended Price Oscillator is a tool that smooths the trend in prices, allowing you to more easily identify cycles and overbought/oversold levels. Basically, if you consider long-term cycles as made up of a series of short-term cycles, then analysing these shorter term components can be helpful in identifying major turning points. The DPO Indicator helps identify these longer-term cycles and remove them from prices. In order to calculate the DPO, you just need to specify a time period.

As the oscillator moves above and below the zero line, minor peaks in the DPO will usually coincide with minor peaks in price. Longer-term price trends are not reflected as the 20-day DPO removes cycles of more than 20 days.

Detrended Price Oscillator compares closing price to a prior moving average, eliminating cycles longer than the moving average. The real power of the Detrended Price Oscillator is in identifying turning points in longer cycles:

1. When Detrended Price Oscillator shows a higher trough – expect an upturn in the intermediate cycle;
2. When Detrended Price Oscillator experiences a lower peak – expect a downturn.

Typical trading strategies for this indicator include for Ranging Markets and Trending Markets:

Ranging Markets

1. Adopt a long position when Detrended Price Oscillator crosses below and then back above the oversold level.
2. Adopt a short position when Detrended Price Oscillator crosses above and then back below the overbought level.

Trending Markets

Typically only ever trade in the direction of the trend not against it.

1. Adopt a long position Detrended Price Oscillator crosses below zero and then turns back above.
2. Adopt a short position when Detrended Price Oscillator crosses above zero and then turns back below.

Normal Calculation

First step is to develop a n-step simple moving average (n is number of periods in MA)

Subtract the MA from days ago, from the closing price.

Typical Charting Program Formula:

C – REF(MA(CLOSE,20),11)

Formula Parameters:

None

Detrended Price Oscillator Indicator Chart: