The detrended price oscillator helps you visualize the peaks and troughs of price action. Unlike other indicators such as the RSI or the MACD, the detrended oscillator has no forecasting value and is only useful for estimating trend duration and magnitude.
That said, the DPO can assist you with setting buy and sell orders by capitalizing on short-term price trends.
How to use the Detrended Price Oscillator
The detrended price oscillator can help you see the space between the peaks and troughs of a given index or security. You can use the information given for entering buy and sell positions. The default lookback period is between 20 and 30 months. In practice, the oscillator helps you see where a security is at in a given market cycle.
Through isolating short-term cycles, traders may get a better idea if it’s better to go long or go short, as well as size their positions accordingly.
How the Detrended Price Oscillator Works
The oscillator works by comparing past prices to a displaced moving average. The SMA is represented by a zero line with the oscillator moving above and below it. When the DPO is above the zero line this means that prices are above the SMA, when the DPO is below the zero line this means that prices are below the SMA.
By using the DPO, you can better see the movement of an index or security. When utilized, it will give you an idea of a security’s high and low range as well as its duration.
To summarize, the DPO is not a momentum oscillator, nor does it help you generate signals. Instead, it’s used in conjunction with other indicators to better understand a security’s market cycle. For this reason, it’s best to combine it with other trend-following and momentum indicators for generating the most reliable signals possible.