The Elliott Wave Oscillator (EWO) is the difference between the 5-period and 35-period Simple Moving Average (SMA) based on the closure of each candlestick.
Formally it can be expressed as:
EWO = SMA (5 period, candlestick) – SMA (35 period, candlestick)
Using the Elliott Wave Oscillator
Interpretation of EWO can be done through what the individual components tell us.
A 5-period moving average is much more responsive to price than a 35-period moving average. Fewer price data points are included in the 5 period. The 35-period moving average has a slower reaction to price because the previous close made up 2.9% (1/35) of the value. On the other hand, the 5-period moving average is based on 20% of the previous candle close.
So, if the price is in an uptrend and this uptrend is stronger than the previous 5 candles over the previous 35, the EWO will be positive. If the price is in an uptrend, but the overall uptrend is strong over the last 35 candles over the previous 5, the EWO will be negative.
Similarly, we can apply this to a downtrend. A stronger downtrend over the last 5 candles compared to the last 35 will create negative value for EWO. A downtrend over the recent 5 candles, which is not as strong as the recent 35 candles, will create negative value for EWO.
Therefore, positive or negative EWO values can be interpreted in different ways.
Positive EWO Value
- a) strengthening trend or
- b) Weakening downtrend
Negative EWO value
- a) strengthening downtrend or
- B) Downtrend weakening
Trading examples of the elliott wave oscillator
The Elliott Wave Oscillator is basically a trend-following indicator.
You can view it in one of two ways. We can look at its value (whether positive or negative) or see its rate of change.
If the EWO is positive and increasing, this is a bullish sign on both fronts. The short-term trend is bullish and the uptrend is getting stronger.
If EWO is negative and increasing, it is double bearish. The short-term trend is bearish and the downtrend is getting stronger.
At the very least, accuracy can be increased if these two conditions must be met when placing a trade. It can be interpreted as long when the indicator is positive and short when the indicator is negative. However, trading based on signals that are inherently out of date is not the best idea.
There are a number of factors that can help you identify trading signals. This may include price, use of support and resistance levels, various technical indicators, and fundamental analysis of the market being traded. Essentially everything you need to make trading decisions.
The EWO itself produces many signals due to the natural frequencies of the 5-SMA and 35-SMA crossovers. However, since it is not a valid trading system by itself, it requires strict filtering. Confidence is improved if you pair the moving average with a longer period moving average (e.g. 50 or 100 period SMA) and trade in the direction of the trend according to that indicator.
In addition, reliability can be improved by ensuring that, for long-term transactions, its value is sufficiently positive to a certain magnitude, instead of a mere positive value for the EWO. For short-term trades, a rule can be established where the EWO is negative by a certain amount. This helps consolidate markets where frequent movements above and below the indicator’s zero line can give a number of weak signals.
Elliott Wave Oscillator Trade Criteria
So, you may have looked at various chart examples of the Elliott Wave oscillator using the criteria below.
1) Long-term trading: positive EWO value (+ X amount) + increased EWO value + positive slope 50-period simple moving average
2) Short-term trading: Negative EWO value (–X amount) + EWO value declining + negative slope 50 period simple moving average
Exit Strategy:
1) End: the EWO size starts to decrease or the simple moving average turns negative
2) End: EWO scale increase or simple moving average rotation
In other words, to trade for a long time, we want the EWO to be not only positive, but gradual on a positive course. Trends interpreted through simple moving averages should also be positive.
Simply put, we want the EWO to be more and more negative, not negative. I also want the simple moving average to be negative.
Breaking any of these signs will give you an exit.
Example # 1
S & Let’s look at the daily chart of P 500.
During this roughly 9 month period, we have 9 trades – 7 longs and 2 shorts, as indicated between the vertical white lines. This was created when all three criteria were met.
For a long time this means a positive EWO value of a certain magnitude, an increasing EWO value, and a positive sloping SMA.
For a short circuit, this means a negative EWO value of a certain magnitude, a decreasing EWO value, and a negative slope SMA.
In total, the 7 longs took advantage of the continued uptrend while producing modest gains. Both shorts broke roughly.
Example # 2
Below is the daily chart of EUR/USD.
In this case we have 6 trades – 3 shorts and 3 shorts, again shown between the vertical white lines.
Our short-term benchmarks remain negative EWO, EWO below -0.05 (this value varies by asset and time period), EWO decline, and minus a simple moving average of 50%.
Our long criterion – positive EWO, EWO above +0.05, EWO increase, and sloping positively with a simple moving average of 50%.
The first four were each more or less winners. The last two are roughly bankrupt.
Conclusion
The Elliott Wave Oscillator uses the basic concept of a moving average crossover to generate trading signals. It is basically a trend-following momentum indicator.
Trading is designed to go in the direction of the indicator. That means long trades for positive EWO readings and short trades for negative EWO readings. Nonetheless, it should be paired with other indicators and ideally with other forms of analysis. This is because these indicators are not designed to be used on their own.
Indicators that incorporate historical data inherently lag prices. They can describe the recent past, but they need not lose sight of what might happen in the future.
EWO and other moving average crossover indicators are more common to check trade ideas generated from price charts. It’s not a good idea to use it as a signal by itself. If a trade idea is flagged by EWO, it should be rigorously filtered by other tools.
You can also use EWO for multiple chart timeframes, from 1 minute time compression to monthly (or higher if these settings are present in your charting software).
