Osma

OsMA is used in technical analysis. It is the abbreviation for Moving Average of Oscillator. It is a representation of variance between the oscillator and moving average over a time. This relationship is one of the basic tools in technical analysis. It indicates the trend in data and can alert when a security is oversold or overbought. This is a very simple indicator, based on the MACD indicator by default, but there are other versions of it that can be found, of course, based on other technical analysis indicators. We will take care of its most popular version, that is Osma for MACD.

MACD itself is one of the most popular, if not the most popular, technical analysis index in the world. It is used by investors who deal with long-term trading on shares as well as currency scalpers. For Moving Average Covergence Divergence this is the best recommendation. It is hardly surprising that someone decided to experiment a bit with this indicator and try to improve it, change or simplify its reading. This is how Osma for MACD was created.

Construction and operation of OSMA

To describe the operation of Moving Average of Oscillator for MACD, we must first deal with the MACD itself. Moving Average Covergence Divergence is an indicator that is based on three moving averages and consists of two lines: MACD and signal lines. The MACD line is calculated on the basis of two variables - it is the difference between the value of the exponential average of 26 periods and the exponential average of 12 periods. The signal line, in turn, is a simple rolling average over 9 periods. These are of course the default settings that are used most often. They can be adapted to their own strategy, however changing the number of periods in the case of MACD is rather rare. Similarly, in the case of MACD in OsMA.

In some versions of MACD available in the network except two lines - MACD and signal line, we will see a histogram. This histogram is OsMA. This is a graphical representation of the difference in value between the MACD line and the signal line.

Using the Moving Average of Oscillator

OsMA for MACD, the most popular version of the indicator, is useful for those investors who are trying to simplify everything that is on their chart as much as possible. We are interested in this case, the histogram illustrated by the difference between the MACD line and the signal line, i.e. the difference between the oscillator and its moving average. Using OsMA instead of MACD is possible only when the investor uses only the signals generated by intersection of the MACD line and the signal line. In the OsMA histogram, we will not see the divergence and the intersection of the zero line by the MACD. The signals are therefore hardly trimmed. The only thing that interests the investor is the moment when OsMA breaks the zero line - this is tantamount to the intersection of the MACD line and the signal. When OsMA was positive and fell below the zero line, it is a sales signal. A negative OsMA that has entered above the zero level gives a signal to take long positions.

Examples of Osma

• Technical Analysis: OsMA is a basic tool in technical analysis. It is used to identify trends and alert when a security is oversold or overbought. A typical OsMA chart will have a moving average line and an oscillator line, with the difference between the two lines representing the variance.
• Trading Platforms: OsMA is a feature that can be found on many trading platforms. It allows traders to identify potential trading opportunities by analyzing the trend in the data. The oscillator line can also be used as a signal to enter and exit trades.
• Forecasting: OsMA also has the potential to be used as a forecasting tool. By studying the trends in the market, traders can gain an understanding of the direction in which the market is going and make informed decisions about their trading strategies.
• Portfolio Management: OsMA can also be used to monitor the performance of a portfolio. By comparing the values of the oscillator and moving average lines, traders can assess the risk associated with certain investments and make adjustments accordingly.

Advantages of Osma

OsMA is a simple, yet powerful tool that can be used in technical analysis. It is based on the MACD indicator and can be used to identify potential market trends and alert when a security is oversold or overbought. Here are some of the advantages of using OsMA:

• OsMA is easy to interpret and understand; it is based on simple calculations and provides a straightforward indication of the current trend in the market.
• OsMA is more sensitive to price movements than other indicators, allowing traders to spot potential trading opportunities more quickly.
• OsMA is a great indicator for detecting reversals and confirming trends, helping traders make more informed trading decisions.
• OsMA is also good at detecting divergence between price and volume, which can be a very useful tool for identifying potential market tops and bottoms.
• Finally, OsMA is a versatile indicator that can be used in conjunction with other indicators, helping traders identify even more potential trading opportunities.

Limitations of Osma

• OsMA is a lagging indicator which means it follows the price rather than leading it. As such, it can generate false signals, especially when the market is in a range.
• OsMA is sensitive to the parameters used in its calculation and can be easily manipulated.
• OsMA can be affected by news and announcements which can cause drastic shifts in the market and create false signals.
• OsMA does not provide an indication of the strength of the underlying trend, only the direction.
• OsMA is not suitable for short-term trading as it does not generate a signal until after the trend has already started.
• OsMA is not always reliable during periods of high volatility, which is when it can generate false signals.

Other approaches related to Osma

• Price Rate of Change (ROC) – This is a momentum indicator which measures the percentage change in price over a given period of time, usually a specific number of days or weeks.
• Average Directional Movement Index (ADX) – This is a trend-following indicator which helps to identify whether a security is trending or not.
• On Balance Volume (OBV) – This is a momentum indicator which uses the volume of a security to determine the trend direction.
• Stochastic Oscillators – This type of oscillator is used to measure the speed and momentum of a security’s price movements. It is used to identify overbought and oversold conditions.
• Bollinger Bands – This is a type of technical analysis indicator which is used to identify potential buy and sell signals by measuring the volatility of a security’s price movements.

In summary, there are several approaches to technical analysis that are related to OsMA, such as Price Rate of Change, Average Directional Movement Index, On Balance Volume, Stochastic Oscillators, and Bollinger Bands. These are all useful tools for traders who are trying to identify trends and anticipate price movements in the market.

Osma — recommended articles

Chande Momentum Oscillator — Bull flag — Trading channel — Overbought oversold indicator — Long-legged doji — Bullish divergence — Bear flag — Dragonfly Doji — Three Black Crows

References

• Bodie, Kane, Marcus. (2003). Investments, McGraw-Hill Primis
• Chenoweth T., Obradović Z., Lee S. Technical Trading Rules as a Prior Knowledge to a Neural Networks Prediction System for the S&P 500 Index
• Murphy J. (1991). Intermarket Technical Analysis, New York
• Murphy J. (1999). Technical analysis of the financial markets, New York Institute of Finance
• Yazdi S. H. M. & Lashkari Z. H. (2013). Technical analysis of Forex by MACD Indicator, International Journal of Humanities and Management Sciences, Vol. 1

Author: Anna Pietruszewska