What is The Oscillator of Moving Average in Forex?
The Oscillator of Moving Average (OsMA) is a technical indicator that helps in determining a trend’s strength in the forex market. You can also identify potential trends before they occur and place a market order with this indicator. In our article, we will learn all about the Oscillator of Moving Average indicator and how to trade currency pairs with the same.
What is the Oscillator of Moving Average?
The Oscillator of Moving Average indicator determines the difference between a currency pair’s Moving Average and oscillator value over a specific time period. The Moving Average Convergence Divergence (MACD) is used as the oscillator in this case, along with a Moving Average (MA) line, which also acts as a signal line. The MA line is plotted as an average of the MACD line, and the OsMA indicator is calculated on the basis of the difference/space between the MACD and MA lines. Together, these two indicators form the OsMA indicator that provides traders with values under or above zero to determine the currency pair’s price trend in the market.
- Values above zero indicate a strong uptrend continuation, signalling traders to enter long orders.
- Values under zero indicate a strong downtrend continuation, signalling traders to enter short orders.
The OsMA indicator is also responsible for providing traders with trading signals in both trending and ranging markets –
- It indicates a bullish divergence when the currency pair prices have been trending below zero for a long period of time, signalling a long order potential.
- It indicates a bearish divergence when the currency pair prices have been trending above zero for a long period of time, signalling a short order potential.
- If the OsMA indicator starts moving downward while still being above zero, it signals a potential increase in downward strength and tells traders to exit long positions.
- If the OsMA indicator starts moving upwards while still being under zero, it signals potential increase in upward strength and tells traders to exit short positions.
How to calculate the Oscillator of Moving Average?
- The first step in calculating the OsMA indicator is to select an oscillator, time frame and type of moving average.
- Next, calculate the value of the Oscillator along with its average.
- Repeat this process a few times to form the oscillator line and MA line. This will depend on the time period of the MA, which means if you have selected a 7-period MA, you need to calculate 7 values of the oscillator at least.
- Subtract the value of the Oscillator from the MA value in order to get the OsMA reading/value. If this is a positive number, it indicates a strong uptrend, and if it is a negative number, it indicates a strong downtrend.
- Repeat the steps for each time period to analyse the trend’s strength.
The formula for calculating OsMA = Oscillator Value – Moving Average Value
Top Oscillator of Moving Average Strategies
The Stochastic Oscillator Strategy
The OsMA uses the Stochastic Oscillator to determine overbought and oversold zones in the market. It does so by including the currency pair’s highest and lowest price levels. When the Stochastic Oscillator identifies an overbought zone, it indicates a strong bearish reversal trend and signals traders to place short orders. Whereas when it identifies an oversold zone, it indicates a strong bullish reversal trend and signals traders to place long orders. The formula to calculate the Stochastic Oscillator Value = [(Closing price – lowest price)/ (highest price – lowest price)] * 100 The indicator provides us with a value between 0 to 100. Whenever the value is equal to or below 20, it indicates an oversold zone (strong bullish reversal potential), and whenever it is equal to or above 80, it indicates an overbought zone (strong bearish reversal potential).
The Relative Strength Index (RSI) Strategy
The RSI strategy is used in ranging markets to indicate overbought and oversold levels by measuring how quickly the currency pair prices change. It also provides us with values between 0 to 100. In this indicator, any value under 30 indicates an oversold market and values above 70 indicate an overbought market. This strategy uses RSI as the oscillator and its averages as the Moving Averages line. The RSI is calculated by taking a particular period's currency pair price differences. This is done by subtracting the closing price from its previous one. Next, the smoothed average of the positive difference is divided by the smoothed average of the negative differences. This gives us the relative strength’s (RS) value which is put into the RSI’s formula to measure if the market is overbought or oversold. RSI = 100 – (100)/(1+RS)
How to trade with the Oscillator of Moving Average
- Look for the OsMA value and currency pair prices diverging from one another.
- Calculate the difference between the two lines to understand if the market is currently in a strong uptrend or downtrend.
- Identify if the market is making new highs followed by dropping OsMA values, as that indicates a weak trend. On the other hand, if both the OsMA and prices are rising, it indicates a strong uptrend. Keep monitoring the direction of the OsMA, as any change in its direction will mark a change in the trend’s direction.
- Keep a close eye on the values of the OsMA. If the values are increasing, irrespective of being above or below zero, it indicates increasing buying pressure and signals you to place long orders. If the OsMA values are decreasing, irrespective of being above or below zero, it indicates increasing selling pressures and signals you to place short orders.
- As soon as the OsMA line crosses the zero line or MA line in the upward direction, it confirms a strong bullish trend. However, when the OsMA line crosses the zero line in the downward direction, it confirms a strong bearish trend.
Use the Oscillator of Moving Average and identify market trend strength
The OsMA is a valuable indicator to confirm market trend direction and identify potential reversal signals. Start trading with our forex trading platform in Australia to try out the OsMA indicator. Sign up for a live trading account or try a risk-free demo account on Blueberry Markets.
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