Who discovered trading? He/she should be filthy rich now, yah? I wish I were the one—I would be taking breakfast in Tokyo, lunch in London, and supper in New York.
Nonetheless, I’m still not a worried man ‘cos I know I can still achieve my goals while trading. Since I “discovered” forex trading, I’ve aimed to stay profitable by using various tools to help make trading decisions.
So, today I’m going to review one of the indicators of the MT4 platform that’s not very common (but very important) — the oscillator of moving average indicator (abbreviated as OsMA) indicator.
What is the OsMA indicator and how to use it?
The OsMA is one of the essential tools in technical analysis used to demonstrate the momentum of price action in the market. It is computed by subtracting the shorter-term moving average from the longer-term moving average.
Since I started trading, I’ve seen that the 12 period moving average and the 26 period moving average are the most widely used. As such, the OsMA is best described as a sister to the MACD indicator – so they have some similar attributes.
When the OsMA indicator passes through the zero or centre line, you can use it to gauge whether the bullish momentum is gaining ground, or if the power is in the hands of the bears.
To make a decision on the biases I should take during any trading day, I often look at whether the histogram is above or below the zero line.
Basically, the OsMA indicator is used to identify when an asset is overbought or oversold, or when a new trend is getting established.
An asset is generally considered overbought when the indicator gives a reading of above +0.0010 and oversold when it gives a reading of below -0.0010.
Here is a chart of a forex pair with an OsMA indicator shown below it:
If the value of the oscillator moves towards the upper extremes (above +0.0010) of the indicator (A), it sends word that the asset could be overbought.
On the other hand, if it moves towards the lower extremes (below -0.0010) of the indicator (B), it is interpreted that the asset could be oversold.
In most cases when I see the indicator turning from negative to positive (D), I take it that an uptrend could be starting to be established.
Conversely, when I see the indicator turning from positive to negative (C), I often interpret it that the bears could be starting to exercise their dictatorial rule in the market.
What are the disadvantages of the OsMA indicator?
The OsMA indicator is not the reliable indicator to use when the market is very volatile and choppy because it will give fake signals. For example, during volatile market conditions, the oscillator may cross below the zero line signifying that a downtrend has began.
However, this turns out not be the case as price reverses to the original direction without warning. Therefore, you should always use the OsMA indicator in collaboration with other appropriate indicators to avoid an early death as a trader.
What are the advantages of the OsMA indicator?
One of the reasons why I like OsMA indicator is that I can use it mutually as a momentum and as a tendency indicator.
It is a useful way of quickly assessing the current trend and momentum in the forex market. The OsMA, when combined with other indicators, is particularly important in forecasting short-term market trends.
My personal opinion on the OsMA indicator
To say the truth, success when using the OsMA indicator is relative; in other words, it’s as good as the trader who interprets its signals.
It gives very reliable signals when interpreted correctly but sucks when misinterpreted or the trader does not use other methods to complement its signals. The key is to master its correct use and to take only reliable signals.
