The Acceleration/Deceleration Oscillator (AC) measures whether the market driving force is increasing or decreasing. It gives you an early warning of changes in price direction:
- The AC indicator changes direction before the driving force does
- The driving force changes direction before the price does
When you use the AC indicator, you’re two steps ahead of changes in price direction, so you can make your move before the price does.
The Nought Line
The naught line is where the driving force is constant; it isn’t increasing or decreasing. This doesn’t mean that the price is also constant:
- The driving force could be positive but constant – in which case, the price is increasing
- It could also be negative and constant – in which case, the price is decreasing
If the AC indicator is above the nought line, it’s likely that the price will increase, and if it’s below the line, the price is likely to decrease.
Buy and Sell Signals
When the AC indicator crosses the nought line, it’s not a buy or sell signal. This is different from some other indicators, such as the Awesome Oscillator. Instead, you need to wait for confirmation of a trend before buying or selling. You can do this by watching the colored bars, which represent 15-minute time intervals:
- A bar is green if the driving force has increased since the previous interval
- It’s red if the driving force has decreased
The following table summarises the buy and sell signals.
|Above/below nought?||Signal||Signal type|
|Above||2 green bars||Buy|
|Above||3 red bars||Sell|
|Below||2 red bars||Sell|
|Below||3 green bars||Buy|
As shown in the table, you need to wait for an extra interval if you’re trading against the driving force, as you need additional confirmation. For example, if you want to buy when the driving force is below nought, you need three green bars, not two.
The AC indicator is derived from the Awesome Oscillator (AO) indicator. It’s the current value of AO minus the simple moving average (SMA) of AO over the most recent five intervals:
AC = AO – SMA( AO, 5 )
AO is, in turn, the SMA of the median price (MP) for five intervals, minus the SMA of the MP over 34 intervals:
AO = SMA( MP, 5 ) – SMA ( MP, 34 )
The median price is the average of the high and low prices in an interval.
MP = ( high price – low price ) / 2
Note that the SMA is just the sum of the values over a number of intervals, divided by that number of intervals. For example, to get the SMA over five intervals, add up the five values and divide by five.