Detrended Price Oscillator (DPO)

Overview

The Detrended Price Oscillator (DPO), described in Steven Achelis' book "Technical Analysis A-Z", attempts to eliminate the trend in prices by filtering out cycles longer than its moving average. It accomplishes this by comparing the current price to a moving of price (n/2)+1 periods ago. By detrending prices, shorter-term cycles are more easily identified allowing for a quicker determination of potential overbought and oversold levels.

Interpretation

The Detrended Price Oscillator can be used in a variety of ways:

Identifying Overbought/oversold Conditions: Identify common overbought and oversold values based on observation of past behavior of the DPO; trade long when the DPO crosses below and then back above the oversold value; trade short when the DPO crosses above and then back below the overbought value.

Going with the trend: The DPO can also be used to signal long trades when the DPO crosses above the zero line and short trades when it crosses below the zero line.

Divergence: Look for divergence between the DPO and the instrument's price; bullish divergence occurs when the DPO makes a higher low while price makes a lower low; bearish divergence occurs when the DPO makes a lower high while the price makes a higher high.

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