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Monday 19 March 2012

The detrended price oscillator (DPO)

19th March 2012,Monday

The detrended price oscillator (DPO) is an indicator in technical analysis that attempts to eliminate the long-term trends in prices. Leaving short-term trends, the indicator allows immediate overbought and oversold levels to be found more effectively.

The detrended price oscillator is clearly a form of price oscillator, and is related to the "percentage price oscillator" (PPO) and the "absolute price oscillator" (APO). The APO is an essentially equivalent to the well-known MACD indicator. A PPO is an improved alternative to the APO or the MACD for use when a stock's price change has been large, or when comparing the oscillator behavior for different stocks which have significantly different prices.

Although these are not so commonly used with the DPO, for the other price oscillators, as for the MACD, a signal line is frequently generated for the price oscillators by taking an exponential moving average (EMA) of the price oscillator values and plotting the two lines together. A histogram can also be generated for the price oscillators, if desired, just as is done for the MACD indicator.

The DPO is calculated by subtracting the simple moving average over an "n" day period and shifted n/2+1 days back from the price.

To calculate the detrended price oscillator:

Decide on the time frame that you wish to analyze. Set "n" as half of that cycle period.

Calculate a simple moving average for n periods.

Calculate (n / 2 + 1)

Subtract the moving average, from (n / 2 + 1) days ago, from the closing price:

DPO = Close - Simple moving average [from (n / 2 + 1) days ago

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