The meaning of such calculations becomes evident on the chart: the OsMA turns a bit faster than the MACD, not to mention the classic signal for trades on all types of oscillators which crosses the zero line much earlier.
Technical analysts have appreciated the idea of averaging the MACD differences by including the Moving Average of Oscillator in the standard indicator package of most standard trading platforms. However, traders rarely use this derivative, preferring to include the "classic MACD" in their strategies. The article will help the reader to grasp the idea of the tool calculation and understand the advantages and disadvantages of OsMA. Description of the indicator
One of the most widespread up to now strategies to work on the trend is the technique of entering on the crossing (crossover) of "fast" and "slow" moving average lines. It was just one trading signal, until Gerald Appel created the MACD, supplementing the signals of the curves with a histogram, the length of the bars of which showed the measure of divergence between the moving averages of different periods:
The maximum divergence between the curves could be interpreted as the overbought or oversold condition of the asset analyzed with the two EMAs. Gerald Appel suggested to identify these zones by plotting the average value curve of the EMA bars (MACD) with period 9 on the MACD indicator, the so-called signal line. Oversold and overbought zones were defined by positive or negative values of the bars crossing the signal line. As soon as they became smaller, the trader received an entry signal much earlier than the crossover point, which was also displayed on the Appel indicator.
OsMA accelerates these signals by the method of finding the difference:
You can see in the picture that the OsMA histogram derived from the second derivative of the difference more accurately displays market lows and highs one candle ahead, while keeping the entry signal in the overbought/oversold zone.
Being one candle ahead gives an advantage in divergence signals and indicates points of additional trades along the trend to build a pyramid. How to use the indicator in trading
OsMA is recommended for use on the daily timeframe in trading systems with other indicators. In the classical single interpretation, the oscillator gives the following signals: BUY order is opened on the market after the candle closes, which led to the transition of histogram from the negative area to the positive values; SELL order is opened on the market after the first bar of the histogram below zero.
The emerging divergences of the OsMA readings divergence from the quotes on the chart are considered as a filter for the accuracy of the signals of histogram transition through the zero mark: the bullish divergence of the price sets the next maximum above the previous value. In the basement of the chart the maximum of the histogram turns out to be lower in comparison with the readings, which coincide with the previous maximum of the chart quotations; Bearish divergence the next minimum of the fall, which turns out to be lower than the previous values, is not confirmed by the growth of lows on the OsMA histogram. The detected divergences do not change the tactics of entering the trade it is made when the zero mark on the first change in the value of the histogram from plus to minus or from minus to plus.
One more widespread variant of the additional entrance gives a situation of renewal of a trend. It is preceded by consecutive approach of histogram bars to the zero value, when each subsequent bar becomes shorter, but does not cross the horizontal line. Instead, once the minimum is reached, the same successive increase in the histogram begins. The signal to enter gives the second value from the minimum on the obligatory condition that the indicators of the histogram did not change the sign. This indicates the end of the correction and preservation of the current trend direction.
Each trade is accompanied by a Stop Loss position, located behind the extremum of the previous candle: Maximum of the tail for a SELL-order; Below the minimum of the tail at opening of a BUY position. Profit fixing takes place when the histogram reaches the area opposite to that of the position opening signal. Early order closing is possible if a divergence is detected, in case of long term strategies, the divergence can be used to move the stop loss to Breakeven. Setting and description of settings
OsMA is located in the trading platform Metatrader in the section "Oscillators", option "Indicators", menu "Insert". The full name of the instrument Moving Average of Oscillator is displayed in the program.
The first installation on the chart opens the settings window, which is exactly the same as the MACD "Parameters" tab. This explains the default values of the two moving EMAs with periods of 12 and 26 and the average difference of those values with a period of 9.
Gerald Appel picked up the above values for the day candle range, settings for smaller timeframes can be found in the trading recommendations for the MACD. Conclusion
The Moving Average of Oscillator gives a signal ahead of the MACD reading but the testing has not revealed any objective advantage which is an increase in the number of profitable deals. Modification of the formula has had a positive effect on divergence detection and trend continuation signals. Given the frequency of crossovers, the indicator is suitable for short-term strategies or filters protecting against entries at the top and bottom of the market in trend-following strategies.