Detrended Price Oscillator (DPO) is an indicator that helps eliminates trends in prices and allows traders to more easily identify cycles based on looking at overbought/oversold levels.
It is used to isolate short-term cycles from long-term cycles. By eliminating long-term trends, it allows traders to focus on shorter price moves, thus making it easier to spot an overbought/oversold level and take advantage of the imbalance.
How does it work?
Detrended Price Oscillator compares the closing price to a prior moving average. This eliminates all cycles that are longer than the length of the moving average. You can then control the period you are focusing on.
The standard indicator setting is 20-period and all cycles are calculates looking at only the last 20 bars.
Trading During Trending Markets
Once a trend is found you would look to trade in the direction of the trend.
You buy when the line hits zero from below or dips below zero for a while and then goes up above zero.
You sell when the line hits zero level from above or even crosses above zero for a while and then turns back below zero.
Trading During Ranging Markets
You identify overbought or oversold levels manually for every trading pair taking into account the past price and indicator behaviour.
You buy after the line drops below an oversold zone and then exit the trade when it closes above the oversold zone or the zero line for the more cautious.
You sell after the line rises above an overbought zone and then exit the trade when it and closes below the overbought zone or the zero line for the more cautious.
How to trade with it