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The Forex Detrended Price Oscillator

By: Terry Allen
The Detrended Price Oscillator (DPO) does not have an accredited designer. This Forex tool is able to smooth out long-term price trends helping its users to more easily detect short-term market tops and bottoms. Basically, DPO values are the results of subtracting a simple moving average from its closing value over a selected time-period and then shifting it back by n/2+1 periods. The DPO fluctuates about zero.
Positive DPO values indicate that price should rise whilst negative ones signal bearish price movements. The DPO has a smoothed-out function, which is very effective at exposing overbought and oversold market conditions that other indicators miss. Research and trading experience have determined that the best DPO time-period is 20.
The DPO begins to produce a buy signal when it starts to move back above its zero line into positive territory. You can use the DPO to detect new trading opportunities as follows. If price and the DPO values are oversold, but then both surge to the upside you should consider this trading sequence as a strong buy signal. The DPO also produces sell signals when its values drop below its zero line and become negative. If price and DPO values are overbought, but then plunged downwards you can regard this event has a strong sell opportunity.
Price and the DPO are highly correlated and any peaks and troughs generated by one of them are mirrored almost exactly by the other. DPO is very proficient at detecting price reversals using longer time-frames. For instance, if the DPO begins to record a series of higher lows, then you should expect price to break to the upside. Similarly, should DPO start to produce consecutive lower peaks, then a price movement to the downside could be imminent.
You should use the DPO in a ranging market in the following way. When DPO drops below and then reverses back above its oversold level, you should consider opening long positions. Similarly, you should think about opening short trades when the DPO rises above, but then drops below its overbought level.
During trending markets, you should use the DPO as follows. You should consider activating long trades after the DPO has dropped below and then climbed back above its zero line. Similarly, you should think about opening short trades after DPO has fallen below, but then reverses back above its zero line.
Terry Allen
About Terry Allen

Terry Allen is a career Forex trader who has written hundreds of articles for DailyForex and other industry websites. He is the co-author of an Amazon e-book titled Kick-Start Your Forex Career, which outlines the information that everyone needs to know before starting to trade Forex. Terry has been featured on Benzinga and Seeking Alpha.


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