The Detrended Price Oscillator (DPO) is a technical indicator that is used to identify cycles in a security's price that are shorter than the trend. It was developed by Walter Bressert in the 1990s and can be used to identify cycles that are shorter than the trend in any market.
The DPO is calculated by taking the security's typical price (the average of the high, low, and close) and then subtracting the moving average of that price, but shifted forward by a certain number of periods. This number of periods is typically equal to one-half of the length of the cycle that the trader is trying to identify.
The DPO is plotted as a line on a chart and oscillates around a zero line. When the DPO line is above the zero line, it suggests that the security's price is above its cycle's average, while a DPO line below the zero line suggests that the security's price is below its cycle's average.
The DPO can be used in several ways to generate trading signals. One of the most common ways is to look for crossovers of the zero line. When the DPO line crosses above the zero line, it generates a sell signal, and when the DPO line crosses below the zero line, it generates a buy signal.
Another way to use the DPO is to look for divergences between the DPO and price action. When the DPO is making new highs while price is failing to do so, it can be a bearish divergence and a warning of a potential trend reversal. Similarly, when the DPO is making new lows while price is failing to do so, it can be a bullish divergence and a warning of a potential trend reversal.
It's important to note that the DPO is a cycle indicator and it's a lagging indicator, which means that it is based on past price data and may not always provide accurate predictions about future price movements. As with any indicator, it is best to use the DPO in conjunction with other indicators and analysis techniques to confirm signals and get a better understanding of the market conditions.
Keep in mind that the Detrended Price Oscillator (DPO) is a technical indicator that is used to identify cycles in a security's price that are shorter than the trend