DEFINITION of 'Detrended Price Oscillator (DPO)'
An oscillator that strips out price trends in an effort to estimate the length of price cycles from peak to peak, or trough to trough. Unlike other oscillators, such as the Stochastic or MACD, detrended price is not a momentum indicator. It highlights peaks and troughs in price, which are used to estimate entry and exit points in line with the historical cycle.
Calculation: Price (X/2 + 1) periods ago minus X-period simple moving average
Where X is the number of periods; 20 or 30 periods is common.
BREAKING DOWN 'Detrended Price Oscillator (DPO)'
The cycles are created because the indicator is displaced back in time. The chart below shows the indicator does not appear at the far right of the chart, and is therefore not a real-time indicator. The historical peaks and troughs in the indicator provide approximate windows of time when it is favorable to look for entries and exits, based on other indicators or strategies.
In the example below, stock in Armonk, N.Y.-based International Business Machines (NYSE:IBM) is bottoming approximately every 1.5 to 2.0 months. Upon noticing the cycle, look for buy signals that align with this time frame. Peaks in price are occurring every 1.0 to 1.5 months- look for sell/shorting signals that align with this cycle.