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.