The Detrended Price Oscillator attempts to isolate short-term trends by “filtering out” longer-term trends. It does so by comparing the closing price to a prior moving average.

The purpose of the indicator is to look at overbought or oversold conditions within a longer trend.

The formula for a Detrended Price Oscillator is as follows:

Detrended Price Oscillator = [Closing Price – (Moving Average of (N / 2 – 1) days ago]

The Detrended Price Oscillator has several uses and interpretations, primarily designed to take advantage of overbought and oversold conditions within part of a large trend:

One interpretation is to identify past oversold and overbought conditions in the price chart, and use that as a baseline for what is considered overbought and oversold.

For example, let’s say overbought conditions are at +1.5 and oversold conditions are at -1.5. When the indicator goes above 1.5 and then dips back below, it could be considered overbought and trending downwards as an intermediate trend within an overall larger trend. Conversely, when the indicator goes below -1.5 and then spikes above, it could be considered oversold and trending upwards as an intermediate trend within an overall larger trend.

A second interpretation is to look for divergences in DTO vs. the main price chart or against a longer moving average. If peaks or valleys in the DTO are higher or lower then they are in the main price chart or longer moving average, it could indicate an intermediate trend change. A higher valley or trough could indicate a bullish trend while a lower peak could indicate a bearish trend.

Finally, some traders simply use a crossover of 0 as indication of a trend change.