How to Use the MT4 OSMA Indicator

Many beginner Forex traders ask this question: what is the OSMA indicator? OSMA is a technical indicator, which stands for an oscillator for the moving average. This measure essentially shows the distance between the oscillator and its moving average. Basically, this indicator is used to detect when the given currency pairs are overbought or oversold.
The Moving Average Convergence/Divergence is the most frequently used oscillator. In fact, the Metatrader 4 platform also uses MACD for its OSMA measurements.
On the daily charts, the main MACD line shows the difference between 12-day and 26-day exponential moving averages. On the Moving Average Convergence/Divergence charts there is also a signal line, this displays the 9-day moving average of MACD values. It is at this stage, where OSMA comes into the play, which measures the difference between MACD and the signal line.
The standard OSMA indicator on the chart will look like this:
MT4 OSMA indicator for beginners
The upper section of this image shows the standard daily EUR/USD candlestick chart with the 14-day simple moving average line, the one below displays the OSMA chart, black columns showing the difference MACD values and the signal line.
So how to use the OSMA indicator for MT4? Essentially, increasing OSMA can be interpreted as a bullish sign and if it goes from negative to positive then it can represent the beginning of the uptrend. The opposite is also true, if OSMA goes negative it can point to the formation of the downtrend.

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Description of the OSMA Indicator for MT4

So what does the above daily chart say about the latest developments with EUR/USD pair? As we can see this pair has gone through several stages:
  • From January 2020, OSMA went negative and during the same time, Euro entered a downward trend, falling from 1.12 to 1.07 range for a period of time.
  • By the later February, the single currency was on the offensive again, rising steadily and at one point piercing 1.14 mark.
  • Regardless of this development, it was all short-lived. The OSMA for this pair slipped back into negative territory and EUR/USD consolidated around 1.09 level in recent times..
As long as an oscillator for the moving average stays well below zero, predicting a major trend change can be premature. So depending upon the economic data and price action, the pair might settle down for some trading range, or alternatively resume its long term downward trend.

Advantage of the OSMA Indicator for MT4

One of the most important advantages of using the MT4 OSMA indicator for beginners is that it helps them to visualize the strength of the trend. To illustrate this let us take a look at this Euro/Dollar chart:
OSMA indicator Forex
The weekly chart above shows the long term direction of EUR/USD, combining candlesticks with the 20-week simple moving average. As we can see, by spring 2017 the OSMA indicator crossed the zero line, became positive, and kept increasing for several months until reaching extreme levels in Summer. At the same time, the Euro was in a strong uptrend, rising from $1.0600 to eventually surpassing $1.2400. This is approximately 17% appreciation against the dollar, which is a significant change.
From January to March 2018 the pair consolidated and settled for the 1.22 to 1.24 range, however during the same time OSMA started to fall consistently until going below zero marks by April 2018. From the 2nd quarter of that year, EUR/USD entered into a relatively slow, but steady downtrend with recently trading near 1.09 level. For all this time OSMA indicator remained in the negative territory, although it is slightly higher and closer to zero than a year ago.
Obviously it is difficult to tell how long the EUR/USD downtrend will continue, as we can see from the first daily chart above there was a short-lived 2-week window during March 2020, where OSMA turned positive, however, subsequently it still slipped into negative territory. As long as this state of affairs continues, it might be premature to talk about any major trench change.
So what can we learn from this example? How to use the OSMA indicator for MT4?
Well, as we can see that larger column of the OSMA chart coincided with strong trends, however, as this indicator got closer to zero both uptrends and downtrends became much weaker. It might be also helpful to mention that as OSMA turned negative in April 2018 it signaled a major trend change, which materialized during the following months.
So essentially, MT4 trading upon the OSMA Indicator provides a Forex trader with visual aids to see the direction of the currency pair and also measure the strength of the trend.
Basically, after going through the MT4 OSMA indicator tutorial, a trader can analyze charts of several currency pairs. Then he or she can select those securities where OSMA points to a clear uptrend or downtrend and trade accordingly. This indicator can also be used to predict the trend change, however, in this case, the trader must always be aware of the false signals.

Limitations of MT4 OSMA indicator strategy

Despite its impressive predicting power, the oscillator for the moving average is far from being an infallible guide for successful trading. For example in a highly volatile market, OSMA can give out false trend change signals, or alternatively downtrends or uptrends might not turn out to be as strong as this indicator might suggest. For some real-life examples of this, let us take a look at this GBP/USD weekly chart:
How to use OSMA indicator for MT4
As we can see everything here started predictably. In the spring of 2017, OSMA overcame zero levels and steadily increased until reaching its peak by the first quarter of 2018. During the same period, GBP/USD was engaged in an uptrend from 1.2400 to eventually overcoming 1.4200 marks. As a result, the Pound appreciated by more than 14%. At this point, OSMA started to fall sharply, eventually ending up deep into negative territory in less than 3 months. At the same time, the decline of GBP/USD turned into a long term downtrend.
So as we can see so far, OSMA proved to be a very helpful predictor of market trends. However, here is the point where some interesting things happened. As 2019 began, the pair consolidated between 1.28 to 1.32 range. At the same time, OSMA started rising again, eventually crossing the zero and turning positive again. So according to everything we have seen so far, this should have signaled an end to the downtrend and beginning of the steady GBP/USD appreciation.
Despite those expectations, this currency pair collapsed, breaking down to as low as 1.21 level and as it happened, OSMA returned to negative territory. This scenario was essentially repeated in the late autumn of 2019. Here again, rising OSMA gave a false signal of the trend change, but instead, Pound collapsed once more and the long term downtrend was resumed.
As we can see from those examples above, in many cases the oscillator for the moving average can certainly be helpful for identifying trends. However MT4 trading upon the OSMA Indicator is not a 100% fail-proof solution. This indicator is sometimes susceptible to false signals.
Therefore, instead of using this measure in isolation, it might be a better idea to combine it with other technical and fundamental indicators.
Returning to our last example with the GBP/USD chart, it might seem difficult to explain why Pound fell in March 2020. After all, OSMA was increasing, there was a potential for reversal. However, if we take into account that COVID-19 concerns triggered the safe-haven trades and Bank of England slashed rates to 0.1%, then we might come up with a clearer picture.

Where can one download the OSMA indicator?

One good thing about the OSMA indicator is that traders do not need to have to pay service fees to access this information. It is not even required to open a real money trading account and make a deposit. There are several brokers who let new clients open demo accounts free of charge and download free OSMA indicators for MT4.
For example, Axiory offers a free demo account, where a trader can use $10,000 virtual money and put trading strategies at a test without any risk of losing money. After opening the MT4 platform, one can click on the ‘indicators list’, choose ‘oscillators’, and then ‘MACD’. As a result, the OSMA histogram will appear below the traditional candlestick chart, just like we have seen in the images above. Traders are also free to make use of many other technical indicators.

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OSMA Indicator for MT4 Explained - Key Takeaways

  • The Oscillator for Moving Average (OSMA) is a popular Forex indicator, which helps traders with identifying the formation of uptrend or downtrend in a given currency pair. In general, rising OSMA is considered a bullish sign, and falling OSMA is deemed as a bearish indicator.
 What is OSMA indicator
  • One of the key benefits of using OSMA is that it helps traders to visualize the strength of the trend as well as the possible overbought and oversold levels in a given currency pair.
  • Trading with the OSMA indicator does not always guarantee success. Despite its obvious strength, just like any other method, it has its weaknesses. For example, since OSMA is entirely based on moving averages, during a very volatile market this indicator might be influenced by false signals. Therefore, it might be more advantageous to use this metric with other measures.

FAQ: MT4 OSMA Indicator Basics

Are there any real-life examples, where the OSMA indicator predicted a major trend change?

There are many examples, where the OSMA indicator MT4 tool has correctly indicated a significant trend change. One obvious example of this is USD/JPY. By early 2012 the pair was confined to the 75 to 82 range and struggled to break out of this range. During January the same year, OSMA overcame zero levels and started to increase steadily. As a result, the USD/JPY rallied well into 2015, eventually even reaching 120 marks.
By late 2015, OSMA started falling and after that most of the time, it stayed below but close to zero. Subsequently, USD/JPY fell and consolidated near 110 levels. Nowadays this indicator still stays very close to zero, so at this stage, it might be difficult to talk about any new trend developing in the short term.
Another notable example would be USD/CAD. Here at the beginning of 2013, the US dollar was still trading slightly below parity. However, during the same time, OSMA was steadily increasing, moving to positive territory and rising further for a couple of years.  During the same period, USD/CAD entered into an uptrend, which lasted for more than 2.5 years, appreciating by more than 40% and reaching 1.40 by late 2015.
After this development, the pair fell back and consolidated and mostly settled around the 1.25 to 1.35 range. However, after recent developments and with the Bank of Canada cutting rates to 0.25% the pair has returned to 1.40 mark with increasing OSMA levels. Therefore, in this scenario, the beginning of the new uptrend can not be ruled out.


Which indicators are most useful for combining with OSMA analysis?

Since the OSMA trade indicator is mostly used for trend analysis, it might be useful to combine it with 50 or 200 simple moving averages. This could help to potentially differentiate false signals from the authentic ones when it comes to identifying the formation of a new uptrend or downtrend.
Also, OSMA charts can be analyzed with Bollinger bands. With this approach, a trader can get a better understanding of possible support and resistance levels and compare it to the strength of the trend.
It might be also helpful to combine OSMA with the economic calendar analysis. This could be useful in the sense that major announcements can have a major influence on the currency exchange rates and have some idea about the current Forex trends that can be helpful to come up with more accurate predictions.

What are some of the common mistakes traders make when using the OSMA indicator?

The first very common mistake with OSMA analysis is to use just one timeframe, for example focusing only on 15 minutes, 1 hour, or daily chart. Focusing only one of those options can be potentially very misleading. It is always best to use several timeframes to get a better picture of the price actions.
The second common error traders make is ignoring other technical indicators and only relying on OSMA for the purpose of determining trends and reversals. As we have seen before, there are plenty of examples where this indicator can give false signals, and therefore it is not recommended to use it in isolation. Therefore, combining OSMA with other indicators can be a more reliable method of Forex analysis

What are some other oscillators which can be used to create OSMA?

Besides the Moving Average Convergence/Divergence, there is a stochastic oscillator. This is mostly a momentum indicator, which compares the market closing price of the currency pair to its previous prices over a specific period of time. It is expressed as a number between 0 to 100.
Another well-known oscillator is William’s percentage range, or more simply known as %R. In Forex, this measure compares the closing price of the currency pair to the high-low range of the specific periods of time. It is expressed as a number between 0 to -100. So essentially 0 signifies the highest level of the period in question and -100 denotes the lowest mark during the same time period.
There are several other similar indicators listed in the ‘oscillators’ section in MT4 platforms. Basically, any oscillator and its moving average can be used for OSMA analysis.

Why OSMA is considered a lagging indicator?

The important fact about the OSMA indicator, based on MACD, is that it is entirely dependent on the current and previous exponential moving averages. Therefore, it can happen very frequently that the oscillator for the moving average might give us a piece of outdated information, for example, an uptrend, downtrend, or reversal might be already visible on the traditional candlestick chart before OSMA could point to this. This is one of the downsides of this technical indicator.
For example, we can see from the third chart, that the last GBP/USD uptrend was well underway for several weeks before OSMA levels increased and crossed the zero level. In fact, when this indicator reached high levels, the pair started to stagnate and consolidate, before eventually succumbing to the selling pressure and giving up its gains. This is just another reason why it might not be the best idea to only trade with OSMA and ignore other technical and fundamental indicators.
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