Detrended Price Oscillator

Detrended price oscillator or DPO, as the name suggests, is an indicator which removes long-term price trends/cycles to identify short-term trend cycles and overbought and oversold levels. The idea is that a long-term trend consists of many short-term cycles and one can find good trading opportunities and turning points in trends by smoothing the long-term trend. Detrended price oscillator compares the closing price of a security with its moving average prices (n/2) +1 periods ago.

DPO = Closing Price - Moving Average of (n/2) +1

DPO is considered a handy trading tool as it effectively uncovers the hidden cycles of short term price ranges. The typical time period is 21 or 14 days. Moving Average of (n/2) +1 is represented as a line with value 0 (Zero) and DPO is represented as an oscillator moving above and below the line. Overbought and oversold levels are identified by comparing present DPO levels to past DPO (high and low) levels.

DPO-Indications

With detrended price oscillator, buy signals are generated when the DPO crosses above the zero line and sell signals are generated when DPO crosses below zero line. Traders can also go long when DPO forms higher troughs (as it indicates a possible intermediate uptrend) and can go short when DPO forms lower peaks (as it suggests a possible intermediate downtrend). Divergence between DPO and price can also indicate change in trends. Bullish divergence occurs when DPO makes higher low but the price makes lower low, and bearish divergence occurs when DPO makes lower high but price makes higher high.

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