Elliott Wave Oscillator

The Elliott Wave Oscillator (EWO), also known as the 5/35 oscillator, is basically the 35-period simple moving average (slow SMA) subtracted from the 5-period one (fast SMA). It is displayed as a histogram split into two fields: positive and negative.

The 35-period SMA is slower to react to price as the previous closing price comprises 2.9% of its value (1/35). The 5-period SMA, on the other hand, is 20% based on the previous candle’s closing price.  If EWO is both positive and increasing, this is a strong bullish trend signal. The near-term trend is bullish and the uptrend is getting stronger. On the other hand, if EWO is both negative and increasing, this is a bearish trend. The near-term trend is bearish and the downtrend is becoming stronger.

If price is in an uptrend, and this uptrend has been stronger over the previous 5 candles relative to the previous 35, then EWO will be positive. Conversely, if price is in an uptrend, but this uptrend has been stronger over the previous 35 candles relative to the previous 5, EWO will be negative. It is pretty much the same for downtrends — stronger downtrends over the past 5 candles relative to the past 35 will produce a negative EWO value. A downtrend over the recent 5 candles that has not been as strong as over the past 35 candles will stick to the positive field.

In practice, for long entries, EWO should not only be positive, but be getting increasingly more positive. The trend (SMA) should also be positive. For shorts, EWO should be trending increasingly negative, and the SMA should also be negative. It is considered  time to exit when any one of these signals breaks down.

Calculation

Elliot Wave Oscillator = Fast MA - Slow MA

The EWO formula is almost the same as the Moving Average Convergence/Divergence (MACD) indicator. The only difference is that traditional MACD is based on Exponential Moving Averages, while the traditional Elliott Wave Oscillator is based on Simple Moving Averages.