What Is The Chande Momentum Oscillator & How To Trade With It

Chande Momentum Oscillator

The Chande Momentum Oscillator is a type of technical indicator that measures the momentum of the price. It was developed by Tushar Chande, and was introduced in his book, “The New Technical Trader.”

What is the Chande Momentum Oscillator?

Like any other momentum oscillator, the CMO gauges the direction of the price. It oscillates between the levels of -100 and +100.

The formula for calculating the Chande Momentum Oscillator is:

CMO = sH – sL / sH + sL * 100

Where; sH is the sum of higher closes over N-periods, and sL is the sum of higher losses over N-periods. The N-periods’ value is mostly 20, and the sH and sL values range between -100 and +100.

The CMO calculates the difference between the sum of recent gains and recent losses to predict the price movement over the N-period. As the oscillator measures the strength of the trend, the calculations suggest that the greater the value of CMO, the greater the trend’s strength.

Here’s what the oscillator looks like:

Chande Momentum Oscilltor on a chart
Chande Momentum Oscilltor on a chart

The working principle of the CMO is similar to other momentum oscillators like the RSI and the Stochastics. It measures both uptrend and downtrend, signaling overbought and oversold conditions. But unlike Stochastics, the CMO doesn’t use a signal line to indicate long-term bullish or bearish trends.

How to use the Chande Momentum Oscillators?

As mentioned above, the CMO oscillates between -100 and +100. When the CMO shows a reading of +50, it is an overbought condition. Contrarily, when the CMO is below -50, it’s an oversold condition.

To confirm the overbought and oversold patterns, many traders utilize 10-day Moving Averages with the CMO. The oscillator gives a potential bullish signal when it crosses above the MA and generates a possible bearish signal when it crosses below it.

Chande Momentum Oscillator overbought and oversold levels
Chande Momentum Oscillator overbought and oversold levels

Another way to use the CMO for signal confirmation is through the 0-line. When the 50-day MA crosses above the 200-day MA (golden cross), and the Chande is above the 0-line, it is a possible bullish signal. On the other hand, when the 50-day MA crosses below the 200-day MA (death cross), and the CMO is below the 0-line, it is a potential bearish signal.

The Chande can help traders in determining higher-highs and lower-lows. This means it can spot positive and negative divergences. Positive divergence (bullish) occurs when an asset’s price is declining, and the CMO is rising. Negative divergence (bearish) appears when the price goes up, but the CMO is going down.

A keynote to include is, traders often look for positive and negative price divergences in a trending market.

Chande Momentum Oscillator trading strategy

Like its fellow oscillators, the CMO is suitable for both short-term and long-term timeframes. Therefore, every type of trader can use Chande for their trading strategies. It can also pinpoint exact entry and exit points, giving traders a better understanding of whether they are entering or exiting at the right time.

Chande Momentum Oscillator buy strategy

  • Apply the CMO on the chart.
  • Wait for the price bar to go bullish before entering.
  • Enter the trade when the Chande is above 50.
  • Place a stop-loss near the recent swing low.
  • Exit the trade before the CMO drops below 50.

Chande Momentum Oscillator sell strategy

  • Apply the CMO on the chart.
  • Wait for the price bar to go bearish before entering.
  • Enter the trade when the CMO is below 50.
  • Place a stop-loss near the recent swing high.
  • Exit the trade before the Chande rises above 50.

Chande Momentum Oscillator conclusion

The CMO is an indicator for trying to anticipate the direction of the trend. The oscillator can becomes more effective when it is combined with Moving Averages to identify the trend direction.

The Chande Momentum Oscillator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of technical indicators such as the Chande Momentum Oscillator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.

The Chande Momentum Oscillator is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Chande Momentum Oscillator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Chande Momentum Oscillator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!