The accelerator oscillator, introduced by trader Bill M. Williams in his book Trading Chaos (Marketplace Books by John Wiley & Sons, 1995) measures the acceleration or deceleration of momentum—the rate of change in the “current driving force”—in the price action of a currency pair. For the mathematically inclined, the equation in two parts is:

AO = SMA(median price, 5) − SMA(median price, 34)
AC = AO − SMA(AO, 5)

where SMA = a simple moving average, and AO = the technical indicator known as the Awesome Oscillator, which is used as an input for the accelerator oscillator.

The accelerator oscillator displays its reading as a histogram, in a similar manner to the MACD, in a separate indicator window below the actual chart. In appearance it’s a series of red and green bars of various heights, rising above and falling beneath a naught level in waves, as shown below on the 15-minute chart of the AUD/JPY:

This is an excellent indicator for use with a moving average crossover trading system, as discussed in previous entries here and as shown on the chart above. Because it measures changes in the momentum of the price action, it’s a real-time indicator of what’s going on in the forex trading market, and it serves as a “distant early warning” of changes before they’re reflected in the price itself. This can be a considerable advantage for forex traders who know how to utilize it.

As a trading signal, the accelerator oscillator is largely intuitive; however, it’s more important to watch the colour and height of the histogram bars rather than their position relative to the naught line. In the more detailed example below, note how the histogram bars reflect the “health” of the current trend and not its direction. In this manner it complements the moving average crossover signals, adding an indication of strength to the directional information they supply.

In this downtrend, whenever the price finds a support level, it pauses and retraces slightly. In the window below, the histogram bars turn green, indicating the downtrend’s strength is waning, at least for a while—not that it’s ending.

The traditional forex trading rules of thumb for using this indicator are:

• two or more green bars of increasing height above the naught line are an alert to enter the market long;
• three or more green bars of decreasing height below the naught line are an alert to enter the market long;
• two or more red bars of increasing height below the naught line are an alert to enter the market short; and
• three or more red bars of decreasing height above the naught line are an alert to enter the market short.

However, these are alerts, not entry signals, and the usual warning applies: like all technical indicators in the forex trading market, the accelerator oscillator is not meant to stand alone, but rather is designed to indicate certain market parameters. It is up to the forex trader to build a body of evidence to support a potential market position and to determine if the risk-reward ratio is acceptable prior to entering the market. The accelerator oscillator has much to contribute within that scenario