Detrended Price Oscillator Indicator (DPO) – Definition and Examples

What is the DPO indicator?

The Detrended Price Oscillator, also known by its acronym DPO, is an indicator used in technical analysis which is designed to provide information on the price of an asset taking into account market fluctuations in the short-term but no in broader movements in the medium and the long term. This indicator eliminates the effect of the market movement trend. This simplifies the process of determining cycles and overbought / oversold levels.

In other words, we can say that the DPO does not take into account the price trend and focuses on fluctuations in the trend. The Detrended Price Oscillator is calculated by subtracting from the current closing price the value of the simple moving average of n days or periods. n (the period for the moving average) is calculated by dividing the period chosen between two and adding one.

For example, the calculation of the DPO (20) in a daily chart is the following:

  • Period= 20 days
  • Moving Average Period = (20 / 2) + 1 = 11
  • DPO = Current close – SMA (11)
The final result is an indicator that oscillates around zero as a central value. The crossing of the zero level with the indicator will indicate the buying/selling pressure at the short term.
The logic behind the DPO assumes that the market long term trend is composed of short-term trends and because that, by considering only short-term trends is possible to fully understand the long-term trend. Assuming this, extreme peaks and valleys in the DPO are indicative of likely changes in the global trend of the asset.
Detrended price oscillator in MT4
DPO indicator in Metatrader 4 platform

The overbought / oversold levels in the DPO come from the history of the asset behavior.

Interpretation of Detrended Price Oscillator

Like other oscillators, the interpretation of this indicator is quite simple and direct. When this indicator is above the zero line, it means that the price is above its moving average, which is a buy signal. Similarly, when the DPO is below the 0 line, this means that the market is below the moving average, which is a sell signal. However, there are two interpretations for buying and selling signals:

Buy signal

  1. When the DPO crosses the zero line upwards.
  2. When the DPO is in a confirmed oversold zone, which is proved by the presence of a number of previous low (minimum) of the oscillator, and both the indicator and the price break upward the downtrend line that acts as a resistance.

Sell ​​Signal

  1. When the DPO crosses the zero line downwards.
  2. When the DPO is in a confirmed overbought zone, which is proved by the presence of a number of previous high (maximum) of the oscillator, and both the indicator and the price breaks downward the rising trend line which acts as a support.
The Detrended Price Oscillator is an effective tool to uncover hidden cycles of overbought and oversold conditions in the market. However, like any technical indicator should be used in conjunction with other tools to validate their signals.
You can download a version of this indicator for Metatrader 4 at the following link: DPO indicator for MT4

 

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