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The Detrended Price Oscillator is an indicator used as a long or short signal. In fact, the DPO eliminates cycles that are longer than the moving average period. It leaves thus short-term trends, and it allows both overbought and oversold levels to be detected more accurately. These levels are used with DPO to generate signals; when DPO goes below the upper (overbought) one, which means that the bulls are tired and that the bears are going to dominate the market, you should go short. When the DPO goes up the lower (oversold) line, that means the opposite situation, and you ought then to go long because the market is going to become bullish.
DPO formula is quite simple and its coding does not require from you more than one or two lines. You have first to specify an N-bar period; you calculate the simple moving average of the close price over that period, and then you shift the result N/2 + 1 bars back. You finally subtract the result from the daily close price.
The function I have written takes as argument a time frame (the SMA period multiplied by 2) and returns as result the DPO indicator time-series for that time frame. Therefore, if your time frame is of 40 days, the function calculates the SMA over 20 days and shifts it 11 days back.
Generally, a 20 bars time frame or window value is used.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
