What is Detrended Price Oscillator (DPO) ?

Detrended Price Oscillator (DPO) is an indicator that removes the effects of trends from price movements.

Trend: general direction of price movements.

- DPO simplifies the process, identifies cycles and levels of outbidding (resale).

- Long-term cycles consist of several shorter cycles.

Analyzing short components such as helping to determine the important moments of the development of that cycle.

- DPO provides an opportunity to eliminate the effect on long-term price cycles.

- To calculate DPO, we must take a certain period of time. Remove the cycle that is longer than the selected period of the price movement and leave the cycle shorter. Half of the cycle length is used to smooth the cycle.

- The default setting for DPO indicator is 20-days.

The indicator oscillates around the zero level, and if it takes a 20-day DPO, it will clear the cycle for more than 20 days.

- The limits (overbought / oversold) derived from the previous history of price behavior.

- Overbought is a condition where the price is too high and will not move higher because it is deemed inappropriate and unacceptable if the price is really higher.

- Oversold is a condition where the price is too low and will immediately reverse direction to go up.

The chart below shows the movement of DPO:

1. Indicator calculation formula:

DPO = CLOSE-SMA (CLOSE, (N2 + 1))

Where:

SMA: Simple Moving Avarage

CLOSE: closing price

N: cycle period (if N = 12, DPO is similar to DiNapoli Detrend Oscillator)

2. How to use the indicator:

- DPO is used during Market Trends.

- Identify trends and trade in the direction of the main trend.

- Buy when the DPO reaches zero from above or dips (minor downward correction in Uptrend) below zero for a while and then rises above zero.

- Sell when the DPO reaches the zero level from below or even crosses above zero for a while and then turns back below zero.

- DPO is used when the market starts.

Identifying individual overbought and oversold levels for each currency pair based on the last price behavior.

- Buy after the DPO dips below the oversold zone and then exit when closing above the oversold zone.

- Sell after the DPO enters the overbought zone and then exits when closing below the overbought zone.

Pictures of how to use DPO:

3. Optimization of indicators:

- I recommend 21 periods or less.

It is recommended to stop in a long position if the first DPO falls below the resale level and then goes on it. Crossing from zero from above followed by an increase above that level is also a signal to open a long position, and vice versa with a short position.

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