Moving Average of Oscillator

The Moving Average of Oscillator is best described as an alteration of the MACD. This parallelism is due to the way the OsMA is calculated. It is calculated as the difference between a shorter term moving average and a longer term moving average. The two most commonly used moving averages are the 12 period moving average and the 26 period moving average.

When the indicator is moving higher than zero (the center line) it is clear to see that the instrument is gaining i.e. it is a bullish sign, but if it is going below the center line then it is a signal of it falling to the bearish side. With this histogram traders can easy decide what direction the market is taking, which will determine whether one should buy or sell.

This indicator can be used to spot divergences as well. A divergence is simply when price isn’t in tune with actual underlying momentum. During divergence, you may have a new high on the price chart, but the OsMA is failing to make new highs.

Signals

The trader should buy or sell depending on which side of the center line the indicator is on:

    
  • If the indicator is below the center line the trader is encouraged to sell
  • 
  • If the indicator is above the center line the trader should find opportunities to buy

In most cases, it is advised to use this indicator during a trending market environment.

Calculation

MA1 - MA2


Where,


MA1 = Short Moving Average

MA2 = Long Moving Average