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OsMA Oscillator – Moving Average (of Oscillator)

Discussion in 'Traders Glossary' started by GlossaryEditor, Aug 15, 2015.

  1. GlossaryEditor

    GlossaryEditor Glossary Editor

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    OsMA is an abbreviation that stands for “Oscillator – Moving Average (of Oscillator)”. This is a fundamental method which is widely used in technical analysis to express the deviation between the oscillator value and its moving average for some period. This foundation comes from statistics and could be explained by the fact that some variable has a limited deviation from its mean. That’s why, when the oscillator (i.e. variable) shows significant deviation from its average (i.e. mean) the oscillator has a tendency to return back to its mean. That triggers corresponding price action, since obviously the oscillator is based on the prices of some particular asset.

    It is widely thought that the oscillator itself is a proper tool for the estimation of the overbought or oversold condition of the market. A major distinctive aspect of the oscillator is that it shows the position of the current price relative to some range in percentage value and, hence, is normalized inside +100% of the range. Since it can’t exceed its borders, when the oscillator approaches 100%, the market is treated as overbought and -100% as oversold.

    In our thinking, classical oscillators, such as the Stochastic, RSI and others of that sort have a significant drawback for determining the oversold/overbought conditions due to their normalizing nature. It may be much better to use those indicators that are normalized not by a mathematic algorithm calculation but by the market’s breadth. These are the Momentum and Detrended Oscillator (DOSC) to name a few. The detailed thought process can be read in our Forex Military School Chapter 12, Lesson 6.

    Anyway, all of them are based at the same fundamental concept,

    Oscillator value – n-period MA of oscillator,

    despite what we understand of the “oscillator” term. For example, in the Stochastic in the MACD, the fast line is an Oscillator line, while the second, slower line is a Moving Average from the signal one. As you can see – this is the same foundation as the OsMA formula, although, the stochastic fast line is based on the pure oscillator formula and it’s normalized, while for MACD the fast line is just the difference between two moving averages and so that is not conceptually an oscillator. Sometimes, the oscillator could be used just for close price, as with the Detrended Oscillator and Momentum.
    Visually OsMA could be shown as two lines – the common stochastic oscillator, as a single line – like the MACD Histogram, that shows difference between its lines, Momentum, DOSC i.e. pure OsMA.
     

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