Detrended Price Oscillator eliminates the trend effect of price movement.
This simplifies the process of finding out cycles and levels of outbidding/resale.
Long-term cycles consist of several shorter cycles. Analyzing such short components
helps to define crucial moments of the cycle's development. DPO gives a chance to
eliminate the influence on prices of long-term cycles.
To calculate DPO you should take a certain period. Remove cycles that are longer
than the chosen period from price dynamics, and leave shorter cycles. Half of the
cycle's length is used for smoothing. We recommend using a period of 21 or less.
The bounds (overbought/oversold levels) come from the history of previous behavior
of prices. It is recommended to stand in a long position if DPO first falls below the
resale level and then gets above it. Crossing of the zero point from above followed by
a rise above that level is also a signal for opening a long position. Everything is
vice versa for short positions.