Better market information gives the trader an advantage and improves its trading efficiency. OSMA or Moving Average of Oscillator indicators are one of the technical analysis tools that allows you to analyze the market optimally.
This Forex indicator is based on a moving average, which is a verified trend indicator and an oscillator that allows you to determine the direction of movement in the market.
It should be noted that this trading tool was developed in order to eliminate the MACD indicator from lag and increase the accuracy of inputs. The successful result of such an experiment is currently on the list of basic indicators at the МТ4 trading terminal. So in order to use the indicator, you won 't even have to download OSMA. Just go to the Insert menu and select the Indicators tab, and then click Oscillators, which list contains the tool you are looking for.
Description of the OSMA indicator
As for the formula from which the value of this indicator is calculated, the value of each histogram is the difference between the value of MACD and the moving average - these are the values we see in the indicator window. The interpretation of such a signal is extremely simple - the higher the column, the higher the strength of the current trend.
As for the indicator setting, there are enough customizable elements in the indicator properties to match the optimal readings for a given TF and currency pair:
Fast EMA - This parameter of the OSMA indicator allows you to set the number of candles used to calculate the faster exponential moving average. This is necessary to identify the short-term trend.
Slow EMA - This option configures slower exponential muvings to identify the overall trend.
MACD SMA - This value defines the parameters of the simple moving average, which is the signal line of the SMA indicator.
In the last cell, we select the price parameters that will be used to calculate the data (open, close, and so on).
How do I use the OSMA indicator?
This tool can form the basis for a simple trading strategy. And since it is an improved version of MACD, the format of its use in the strategy is almost similar.
The entry into the market into the long position based on the OSMA indicator is performed after crossing the zero line from the bottom up with the histogram, and the increase in the height of each subsequent histogram after crossing the zero level indicates a strengthening of the new trend.
Short transaction entry occurs when the OSMA indicator histograms stop the zero line from the top down. At the same time each subsequent column of histogram by value is more than the previous one, which confirms the increasing current trend of the market.
We keep the signal open on the market until the height of the columns stops growing - the decrease in the value of histograms indicates a attenuation of the trend of currency movement.
OSMA Divergence Trading Method
Despite good results, it should not be expected that all signals that this indicator provides will lead to the opening of profitable deals. Like any technical indicator, OSMA has a certain percentage of false signals, for example, when performing correction - in this case, the new trend does not last long, after which the main trend movement continues.
In order to protect yourself from such situations and enter the market with a high probability of success, it is necessary to additionally involve other technical tools, levels and other. The optimal result is a comprehensive technical analysis, part of which can be the application of the OSMA histogram. At the same time, it is not necessary to use a large number of filters, the signals of which are often contradictory and still do not guarantee successful entry.
In any case, with the reasonable use of the OSMA indicator, traders have every chance to enter the market by joining it at the beginning of the trend, which led to the spread of the indicator.
OSMA, like its MACD indicator, can be used to detect divergence - the discrepancy between price graph movement and histogram gives a clear signal of trend change. Market entry points found through divergence have quite high profitability, so such an option should not be excluded from its trading strategy.
For example, bullish divergence, indicated by the difference between the extremes of the OSMA indicator and the price chart, causes a signal to enter the Buy market. As can be seen from the graph, the attempt to break through the strong level failed, and the trend is reversed. The significant difference between the extremes of the two local lows in the histogram suggests a decline in the current trend, meaning a reversal is brewing.
The effectiveness of the OSMA indicator is obvious. Moreover, it is indeed devoid of the basic disadvantages inherent in MACD. In practice, this means that most of its signals to market entry are more accurate and timely, which positively affects the success of trade. In the market environment, the absence of signal lag allows you to enter the newly formed trend almost at the beginning, which makes it possible to take the maximum from the market movement. Moreover, the timely warning about the attenuation of the current trend, which gives a histogram, allows us to leave the market in time, protecting the results achieved and not losing the benefits. In fact, this indicator allows you to surely enclose one girl after another with a high probability of their success.
The description of the OSMA indicator implies the need to use filters - they will reduce the number of false signals that are inevitable for any technical indicator.