Detrended Price Oscillator
Posted by Edward Dy on July 4th, 2008
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Photo credit osssmoretti
As the name of this measure indicates, the Detrended Price Oscillator, is a tool for technical analysis that is geared to give information about the price of a certain asset without taking into consideration existing price trends. The rationale behind this principle is that detrended prices can be utilized by traders to give them knowledge about the buy and sell pressure exerted in a particular market on the bases of short-term fluctuations in the asset’s price, without taking considering larger upswings or downswings in the asset’s price.
The Detrended Price Oscillator is solved by declaring a time period indicative of a trend in price. Divide this period by two and add one to arrive at a number n. Next, you need to take the price of asset’s moving average n days before the said period, and subtract this from the closing price of that asset for the period. This calculation will result in the period’s DPO. This method of calculation will ensure that although a DPO chart will include short-term price trends, those with longer-terms are excluded.
One of the basic assumptions of the DPO is that long-term price trends are made up of short-term price trends, and that you can only understand long term trends by studying short-term trends.
By this reasoning, severe peaks and troughs in the DPO that really stand out tend to mean that there will likely be reversals in the overall trend of the price of an asset, and traders therefore should position themselves appropriately if they were to benefit from these reversals in either direction.
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