OsMA Oscillator (Oscillator - Moving Average) is a technical indicator representing the difference between MACD line and SIGNAL line. The indicator is measured as follows:
OsMA = MACD – SIGNAL
We remember that:
MACD = EMA(P, N)-EMA(P, N)
SIGNAL = SMA(MACD, N)
EMA - exponential moving average;
SMA — simple moving average;
SIGNAL — smoothing moving line, indicator's signal line;
N — number of calculation periods;
P – current price (Close, Open, High, Low, Median Price, Typical Price).
Obtained difference is pictured in the form of bar chart (subsequent rectangular bars) and are put from zero up or down. If MACD is above signal line, OsMA values will also be positive, if MACD is below signal line, its values are negative. In this regard, increase in difference between MACD and signal line will also make OsMA value grow that will speak for strengthening of tendency. If the difference will start decreasing, OsMA value will also fall down, and the tendency will lose its strength. Upon crossing of signal line by MACD, OsMA will be equal to 0. Essentially, oscillator shows how the balance of market forces changes.
Let's consider work of Moving Average of Oscillator exemplified by the chart. Standard parameters are used (12,26,9).
Signal for purchase: ОsMA crosses 0 from bottom to top (MACD> SIGNAL)
Zone 1. The distance between MACD and SIGNAL grows, OsMA values grow. Purchasers get stronger, ascending tendency gets stronger.
Zone 2. The distance between MACD and SIGNAL decreases, OsMA starts falling down. Purchasers get weaker, tendency slows down, it is the right time to think about leaving purchase.
Signal for sale: ОsMA crosses 0 from top to bottom (MACD<SIGNAL)
Zone 3.The distance between MACD and SIGNAL grows, OsMA grows negatively. Purchasers caught balance in their hands and push price down, descending tendency gets stronger.
Zone 4. The distance between MACD and SIGNAL decreases, OsMA gets less and less. Tendency slows down, vendors start giving up, it is the right time to leave purchase.
To diminish false signals, it is recommended to define prevailing market trend beforehand. It can be done with the help of other indicators (for example, ADX, MACD etc.) and with the help of other proven methods. Under bullish trend, crossing of line from top to bottom in most part of cases will speak for begging of correction (not recommended to sell against trend) and upon its weakening (OsMA bars start approaching to 0), to search signals for purchase before crossing. This allows finding more profitable entrance points. Under bearish trend everything is quite the opposite.
Divergences and convergence of OsMA
As many other indicators of technical analysis, OsMA is rather good in showing bullish divergence and bearish convergence, which allow catching moments of retracement or reversal at earlier stage.
Moving Average of Oscillator can be called a direct relative of MACD with all that it implies. Benefits include a clear rendering of bull-bear balance at present moment of time, fairly good signals under divergence/convergence. Drawbacks include a lot of false signals under lower time frame, and bad performance of this indicator in the role of overbought/oversold figure.
It helps to remember that there are not ideal settings for any of the indicators, therefore, you always can try with parameters and find the most suitable for yourself.