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Detrended Price Oscillator removes the trend effect of price movement. This simplifies the process of finding out cycles and overbought/oversold levels.
Long-term cycles consist of several shorter cycles. Analyzing such short components helps to define crucial moments of the cycle's development. DPO gives a chance to eliminate the influence on prices of long-term cycles. To calculate DPO you should take a certain period. Remove cycles that are longer than the chosen period from price dynamics, and leave shorter cycles. Half of the cycle's length is used for smoothing. We recommend using a period of 21 or less.
The bounds (overbought/oversold levels) come from the history of previous behavior of prices. It is recommended to stand in a long position if DPO first falls below the resale level and then gets above it. Crossing of the zero point from above followed by a rise above that level is also a signal for opening a long position. Everything is vice versa for short positions.
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Detrended Price Oscillator
Calculation:
where:
- SMA - simple moving average;
- CLOSE - the closing price;
- N - the period of the cycle (if N is equal 12, then DPO corresponds to the DiNapoli Detrend Oscillator).
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