A Moving Average Oscillator is a fascinating tool that can serve as a confirmation in trading strategies. Its versatility allows it to be paired with most technical indicators. In this article, we will demonstrate the application of the Moving Average Oscillator to two well-known indicators and explore the correct usage techniques.
What is the Moving Average of Oscillators?
The Moving Average Oscillator (OsMA) indicator measures the difference between a currency pair’s Moving Average (MA) and its oscillator value over a defined period. In this instance, the Moving Average Convergence Divergence (MACD) serves as the oscillator, alongside an MA line which also functions as a signal line.
The MA line is plotted as an average of the MACD line, and the OsMA indicator is derived from the difference between the MACD and MA lines. These two components combine to form the OsMA indicator, providing traders with values above or below zero to assess the currency pair’s price trend in the market.
- Values above zero suggest a strong continuation of an uptrend, prompting traders to enter long positions.
- Values below zero indicate a strong downtrend continuation, prompting traders to enter short positions.
The OsMA indicator is also useful for generating trading signals in both trending and ranging markets:
A bullish divergence is indicated when currency pair prices have been trending below zero for an extended period, signalling a potential long position.
A bearish divergence is indicated when currency pair prices have been trending above zero for an extended period, signalling a potential short position.
If the OsMA indicator begins to move downward while still above zero, it signals upward strength, advising traders to exit long positions. If the OsMA indicator begins to move upward while still below zero, it signals increasing upward strength, advising traders to exit short positions.
Fundamental Components of Moving Average of Oscillator Indicator
The core components of the OsMA are the MACD line and the signal line. The MACD line is derived by calculating the difference between two exponential moving averages (EMAs), typically the 12-period EMA and the 26-period EMA.
The signal line is a smoothed version of the MACD line, commonly computed as a 9-period EMA of the MACD line.
Process of Calculation Moving Average of Oscillator Strategy
The OsMA calculation involves three primary steps. First, determine the MACD line by subtracting the 26-period EMA from the 12-period EMA. Second, the signal line is derived as a 9-period EMA of the MACD line.
Finally, the OsMA is obtained by subtracting the signal line from the MACD line. The resulting value, displayed as a histogram, oscillates around a zero line.
- The initial step in calculating the OsMA oscillator is to choose an oscillator, time frame, and type of moving average.
- Next, compute the oscillator’s value along with its average.
- Repeat this process several times to establish the oscillator line and MA line.
- The specific period of the MA dictates the number of values needed; for example, a 7-period MA requires at least seven oscillator values.
- Subtract the oscillator value from the MA value to obtain the OsMA reading. A positive value signifies a strong uptrend, while a negative value indicates a strong downtrend.
Repeat these steps for each period to analyse the trend’s strength.
Top Oscillator of Moving Average Strategies
The Stochastic Oscillator Strategy
The OsMA incorporates the Stochastic Oscillator to identify overbought and oversold zones in the market by analysing the currency pair’s highest and lowest price levels. When the Stochastic Oscillator signals an overbought zone, it suggests a strong bearish reversal trend, prompting traders to place short orders.
Conversely, when it signals an oversold zone, it indicates a strong bullish reversal trend, prompting traders to place long orders.
This indicator provides values ranging from 0 to 100. Values at or below 20 indicate an oversold zone (strong bullish reversal potential), while values at or above 80 indicate an overbought zone (strong bearish reversal potential).
The Relative Strength Index (RSI) Strategy
The RSI strategy is effective in ranging markets for indicating overbought and oversold levels by measuring the speed of currency pair price changes. The RSI also provides values between 0 and 100. In this context, values below 30 indicate an oversold market, while values above 70 indicate an overbought market.
This strategy uses the RSI as the oscillator and its averages as the Moving Averages line. The RSI is calculated by analysing the price differences of a currency pair over a specific period. This involves subtracting the closing price from its previous closing price.
Next, the smoothed average of the positive differences is divided by the smoothed average of the negative differences, yielding the Relative Strength (RS) value, which is then used in the RSI formula to assess market conditions:
How to trade with the Oscillator of Moving Average
Observe the divergence between the OsMA value and the currency pair prices. Calculate the difference between the two lines to determine if the market is in a strong uptrend or downtrend.
Identify if the market is making new highs while the OsMA values are declining, as this indicates a weakening trend. Conversely, if both the OsMA and prices are rising, it signifies a robust uptrend. Continuously monitor the direction of the OsMA; any shift in its direction signals a potential change in the trend’s direction.
Pay close attention to the OsMA values. Increasing values, whether above or below zero, indicate rising buying pressure, suggesting long orders. Decreasing values, regardless of their position relative to zero, indicate increasing selling pressure, suggesting short orders. You need to understand first what are oscillators in forex.
When the OsMA line crosses the zero line or the MA line in an upward direction, it confirms a strong bullish trend. Conversely, when the OsMA line crosses the zero line downward, it confirms a strong bearish trend.
Benefits of Using OsMA
Simplicity
The OsMA indicator provides straightforward signals that are easily interpreted by traders at all experience levels. It delivers clear buy and sell signals, making it a valuable tool for informed decision-making.
Trend Confirmation
For example, when the OsMA is above zero during an uptrend or below zero during a downtrend, it confirms the current trend, boosting traders’ confidence in their trades.
Identifying Divergences
OsMA is particularly effective for detecting divergences between price and momentum. Such divergences can often indicate potential market reversals, giving traders early warnings about possible trend changes.
Spotting Overbought/Oversold Conditions
The OsMA can also identify overbought or oversold market conditions. While these conditions can persist in strong trends, they often precede reversals, providing traders an opportunity to adjust their positions accordingly.
Versatility
The OsMA is a versatile indicator that can be applied in various market conditions and trading strategies. Whether used in trend-following, mean-reversion, or breakout strategies, the OsMA offers valuable insights.
Signal Confirmation
OsMA can confirm signals from other technical analysis tools, helping traders filter out false signals and enhance the accuracy of their trading strategies.
Conclusion
The Moving Average Oscillator (OsMA) is a valuable technical analysis tool that traders can leverage to confirm trends, predict reversals, and validate trading signals. By computing the difference between an oscillator, like the MACD line, and its smoothed version, such as the signal line, the OsMA offers key insights into market dynamics. You need to understand the spread in forex in order to be profitable trader.