Overview
The Detrended Price Oscillator (“DPO”) attempts to eliminate the trend in prices. Detrended prices allow you to more easily identify cycles and overbought/oversold levels.
Interpretation
Long-term cycles are made up of a series of short-term cycles. Analyzing these shorter term components of the long-term cycles can be helpful in identifying major turning points in the longer term cycle. The DPO helps you remove these longer-term cycles from prices.The real power of the Detrended Price Oscillator is in identifying turning points in longer cycles:
When Detrended Price Oscillator shows a higher trough – expect an upturn in the intermediate cycle;
When Detrended Price Oscillator experiences a lower peak – expect a downturn.
Trading Signals
First, estimate the maximum length of the cycle that you wish to track. Use half of the cycle length as the MA period. The Detrended Price Oscillator is most effective with indicator periods of 21 days or less.
Ranging Markets
Set overbought and oversold levels based on observation of past price behavior.
Go long when Detrended Price Oscillator crosses below and then back above the oversold level.
Go short when Detrended Price Oscillator crosses above and then back below the overbought level.
Use stop-losses at all times.
Trending Markets
Only trade in the direction of the trend.
Go long when Detrended Price Oscillator crosses below zero and then turns back above.
Go short when Detrended Price Oscillator crosses above zero and then turns back below.
Only execute trades if the trend is intact (price does not close below the MA). Exit using a trend indicator.
Use stop-losses to protect your position.
