The oscillator of moving average (OsMA), also known as the moving average oscillator indicator, is a tool that attempts to identify whether a market is overbought or oversold. How so? By measuring how far an oscillator lies from its moving average. Here we'll discuss the calculations behind the indicator and how you can use the tool in MetaTrader 4.
In the most generic sense, the oscillator of moving average is the difference between an oscillator and its smoothed version. More specifically, the values displayed by the OsMA indicator are most commonly derived from the MACD indicator. To further explain the moving average oscillator indicator, let's first take a quick look at what the MACD indicator actually consists of.
MACD (or Moving Average Convergence/Divergence) is itself an oscillator. The main MACD line is the difference between a 12-period exponential moving average (EMA) and a 26-period EMA. The indicator also plots a signal line, which is a 9-period moving average of the MACD value.
OsMA is the difference between these two key values of the MACD indicator. To be more exact, it is calculated as the difference between the MACD and the signal line value:
OsMA = MACD - signal
It's worth pointing out that you don't always have to use MACD — you can in fact use any oscillator, applying a basic principle of calculating OsMA as the difference between an oscillator and its smoothed average.
Surprisingly, the most common form of OsMA uses MACD. As this is the method utilised by MetaTrader 4, we will be primarily focusing on it.
The Moving Average Oscillator comes as one of the standard indicators bundled with the MetaTrader 4 platform. Remember, the MetaTrader 4 moving average oscillator deals exclusively with the MACD values. If you want an indicator that uses values from a different oscillator, you will have to make a custom OSMA indicator download.
The standard indicators that come embedded with MetaTrader 4 are sorted into four basic groups in the platform's Navigator. These are:
The OsMA indicator is included in the Oscillators folder being listed as Moving Average of Oscillator. See image below.
Clicking on the indicator's name launches a dialogue window that allows you to set four basic parameters. Three of these are the periods over which the various averages will be calculated. The final choice, Apply to, defines the type of price value used for the calculations. The image above shows the various choices available, with the default method of Close highlighted.
As you can see, the MetaTrader 4 moving average of oscillator uses MACD, with a simple moving average (SMA) used for the signal line. The default values for the slow and fast EMAs are standard and are used in the MACD construction. That is, the fast EMA is set as 12 periods, and the slow EMA, as 26 periods.
As we mentioned before, MACD is the difference between these two values:
MACD = fast EMA - slow EMA
OsMA then subtracts the signal line (the 9-period SMA of MACD) from this.
The image below shows the default values for OsMA applied to an hourly EUR/USD chart:
You can find the OsMA values plotted beneath the main chart. What are we looking at exactly?
Remember, OsMA is the difference between MACD and a 9-period SMA of MACD. The extreme peaks and troughs of the histogram mark those times when MACD has diverged most heavily from its moving average. These are the times when you might expect a greater reversal probability.
In addition, there are other trading clues that we can draw from the moving average of oscillator.
Generally put, increasing the OsMA values suggests buying pressure in the market, regardless of whether those values are above or below zero. Similarly, declining OsMA levels suggest selling pressure.
Equally important, crossing the zero line is a further confirmation of the state of the market. A downward cross is bearish, whereas an upward cross, bullish.
Look out for divergence between the movement of OsMA and the movement of price. This is a key sign to help you judge how much conviction to have in a market move. For example, if the market is setting new highs, but OsMA is failing to do so, or is dropping, we would suggest weakness in the trend.
Finally, a change in the direction of OsMA may indicate a trend change. If the OsMa indicator stops decreasing and instead starts to increase in value, it is more advantageous to be long rather than short.
One of the flaws of the OsMA indicator stems from its inherently heavy use of moving averages — similar to MACD. This means it is a lagging indicator. In volatile markets, this will likely hamper your ability to effectively use the indicator. In such conditions, the indicator tends to yield false signals. The indicator can consequently be more useful as a means of confirming shifts in trending conditions.
Please mind that no single indicator can do everything on its own. Each of them will have its own strengths and weaknesses. It is simply unwise to rely solely on the OsMA indicator when making your trading decisions. Be smarter and combine OsMA with another indicator (or even two), to try and mitigate its weaknesses.
One of the best ways to broaden your arsenal of trading tools is by downloading the free MetaTrader 4 Supreme Edition. MT4SE is a plugin for MetaTrader 4 custom built by market professionals to offer a specially selected suite of cutting-edge tools and indicators. Why not give it a go today and discover the benefits of having a superior selection of tools at your disposal?
Another possibility to improve the effectiveness of the indicator is to look at multiple time frames. This will provide a better overview of what's going on. Sometimes, simply looking at one time frame may tell a certain story. In turn, looking at longer time frames can help you understand how this story fits into the larger price patterns of the market.
One of the indicator's chief advantages is making it easy to visually identify likely oversold or overbought levels. Don't forget that one of the key skills when trading reversals in overbought or oversold conditions is managing your risk. Why? Because if the reversal fails to materialise, you will end up on the wrong side of a trending market. Thus, make sure to maintain a disciplined approach at all times and cut any losses in a timely manner.
The surest way to find out what works and what doesn't is to actually give it a try. Obviously, experimenting with real money can become expensive very quickly, which is why testing with a Demo Trading Account is so useful. This allows you to trade live market prices without taking on any unnecessary risk.
We hope that this article about the OsMa indicator will give you some trading inspiration. If you liked this post, why not explore the MT4 Momentum Indicator, a tool that helps you gauge the strength behind market moves.