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:
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
Cycle detection: Use DPO to spot regular price cycles and time entry/exit based on local tops or bottoms.
Entry signals: Buy when DPO bottoms and turns upward. Sell when it peaks and turns downward.
Exit timing: DPO can help determine when a move is exhausted, offering clues to exit before price reverses.
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.
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