As the name implies, the Detrended Price Oscillator indicator (DPO) attempts to eliminate the trends in price through the plotting chart. DPO is based on the fundamental idea that long-term price cycles are made up of short-term cycles. Identifying these short-term components of long-term cycles will be able to help us in finding the major turning points in long-term cycles. The DPO helps to remove these long-term cycles from prices. When DPO is calculated, it is done for a specific time period. All the long-term cycles that go beyond the specified time period are removed leaving the short-term cycles. Thus when the long-term trend is removed from price, overbought/ oversold zones in short-term are readily recognizable. Zerodha Kite charts are equipped with this DPO indicator.
How to choose Detrended Price Oscillator indicator in Zerodha Kite?
- Go to MarketWatch.
- Choose the stock you are going to trade.
- Right click on the stock and select chart from graphic icons.
- Chart window of the stock opens.
- Go to studies. Select studies.
- Go to Detrended Price Oscillator and click on it.
- A small window opens with default parameters of the indicator.
- Once the parameters are selected the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on stocks price.
- By default, DPO uses a 14-period moving average for calculations which can be customized.
- Traders can create buy/ sell positions by identifying short term overbought/ oversold positions.
- One should exit the current position once the buy/ sell stop loss is taken off.
How to trade using Detrended Price Oscillator indicator?
- The indicator works well in all time frames.
- The picture above shows Reliance stock price movement with DPO indicator.
- The chart shows 1 min. timeframe.
- A short position is created when the DPO goes near +2 or come down after reaching the top.
- The short position is closed when the stock price goes near -2 or retraces after reaching the bottom.
- A fresh buy position can also be created at this point.
- In 1 minute chart, traders may find many whipsaws which will be eliminated if longer time frames are used and this indicator is used with a combination of other indicators.
There are 2 main methods to use this technical indicator. The first is to watch the DPO line crossing above or below the zero line. Upward movement is anticipated when the Detrended Price Oscillator indicator crosses above zero and download movement is anticipated when the DPO crosses below zero. Another way of using this indicator is to use it as a predictive tool to measure the length of a trend cycle. This is done by measuring the distance between the peaks and troughs of the indicator and predicting the peaks and troughs in price.
The DPO indicator creates peaks and troughs in consistent intervals and that is a very easy way to predict the exact turning point in the market. Check in the image above the in Reliance share the DPO indicator needed 22 bars to create consecutive peaks. This can give an idea of when the price can change direction.