Detrended Price Oscillator

The Detrended Price Oscillator (DPO) is a technical analysis tool that provides a representation of price movements that have been detrended or stripped of their trend component. It helps traders and analysts identify cycles and price patterns by focusing solely on the deviations from the underlying trend.

The DPO calculates the difference between a specific price point and a historical moving average, typically the simple moving average (SMA) of the price over a specific period. The DPO indicator then plots these deviations on a separate chart, allowing traders to visualize the price movements that are not influenced by the prevailing trend.

To calculate the DPO, follow these steps:

1. Determine the desired period for the DPO calculation. This can be any number of periods, but a common choice is 20 periods.

2. Calculate the midpoint of the chosen period by taking the integer value of (n/2) + 1, where n is the period length. For example, if the period is 20, the midpoint would be (20/2) + 1 = 11.

3. Shift the price data back by the midpoint value calculated in step 2. This means that the current price is plotted on the chart at the midpoint of the chosen period.

4. Calculate the moving average of the price over the chosen period. This moving average is typically a simple moving average.

5. Subtract the moving average value calculated in step 4 from the price value at the shifted position. This gives the detrended price value for each period.

The resulting DPO values are plotted on a chart, typically as a line or histogram, with the zero line as the reference point. Positive DPO values indicate that the price is trading above the historical moving average, while negative values indicate that the price is trading below the historical moving average.

Traders use the DPO to identify potential overbought or oversold conditions, as well as to spot potential trend reversals. When the DPO crosses above the zero line, it suggests that the price is moving higher than the historical average and may be overbought. Conversely, when the DPO crosses below the zero line, it suggests that the price is moving lower than the historical average and may be oversold.

It’s important to note that the DPO is a lagging indicator, meaning it may not provide timely signals for short-term trading. It is best used in conjunction with other technical analysis tools and indicators to confirm signals and make informed trading decisions.