Detrended Price Oscillator (DPO)

⚡ What is it?

The Detrended Price Oscillator (DPO) is a technical analysis tool used to remove the long-term trend from prices and focus on short-term cycles. Unlike other momentum oscillators, DPO is not designed to identify overbought or oversold conditions, but rather to isolate shorter-term price movements and help traders better understand market cycles.

It is particularly useful for traders who aim to time their entries and exits based on short-term momentum swings without the interference of longer-term trends.

⚙️ How it works

DPO works by comparing a past price (typically the closing price) to a simple moving average (SMA) of a specified period. The formula essentially subtracts a shifted SMA from the current price to display how far above or below that average the price is.

Formula:

DPO = Close(price - (n/2 + 1)) - SMA(n)

Where:

• n = chosen period (e.g., 20)

• SMA(n) = Simple Moving Average over n periods

The result is an oscillator that fluctuates above and below the zero line, representing short-term price cycles relative to the moving average.

📖 How to read it

• When the DPO is above zero, the price is higher than the average — indicating a possible bullish short-term cycle.

• When the DPO is below zero, the price is lower than the average — suggesting a bearish short-term cycle.

• A peak in the DPO may precede a local price top.

• A trough in the DPO may precede a local price bottom.

This makes DPO helpful for identifying short-term reversals and potential cycle highs/lows.

⚙️ Best settings

There’s no one-size-fits-all, but some commonly used settings include:

• Period: 20, 21, or 30

• Timeframe: Works best on daily or hourly charts for swing or short-term traders.

The period should align with the typical cycle length you want to study. For example, if you trade based on a 10-day swing cycle, a 20-period DPO might suit your style.

🛠️ How to use it in a strategy

1. Cycle detection: Use DPO to spot regular price cycles and time entry/exit based on local tops or bottoms.

2. Entry signals: Buy when DPO bottoms and turns upward. Sell when it peaks and turns downward.

3. Exit timing: DPO can help determine when a move is exhausted, offering clues to exit before price reverses.

4. Filter tool: Combine DPO with a trend indicator (like EMA) — only trade DPO signals in the direction of the overall trend.

Example:

• In an uptrend (verified by EMA), enter long when DPO crosses up from below zero.

• In a downtrend, use DPO peaks to enter short positions.

❌ Common mistakes

• ❌ Using DPO alone: It doesn’t signal trend direction — it isolates cycles, so use it alongside trend tools.

• ❌ Misinterpreting long-term moves: DPO is best for short-term analysis — don’t use it for long-term forecasting.

• ❌ Lagging signals: Since it uses past prices, DPO is slightly lagging. Confirm with price action or volume.

🌟 Final thoughts

The Detrended Price Oscillator is a great tool for traders looking to exploit short-term price cycles without the "noise" of longer-term trends. While not suitable for identifying overall market direction, its ability to isolate cyclical highs and lows makes it valuable in range-bound or cycle-driven markets.

Use DPO alongside trend confirmation indicators and proper risk management to unlock its full potential in your trading strategy.