The Chande Momentum Oscillator (CMO) 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”. The CMO indicator is created by calculating the difference between the sum of all recent higher closes and the sum of all recent lower closes and then dividing the result by the sum of all price movement over a given time period. The result is multiplied by 100 to give the -100 to +100 range.
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:
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.
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 oscillating in a narrower band around the zero line, with no penetration of the Overbought and Oversold levels indicates a ranging market. This should not be confused with Chande Momentum oscillating between either the Overbought and the zero line, or the Oversold level and the zero line, which indicates a strong up- or down-trend. The strongest trend signals are from failed swings.
A security is deemed to be overbought when the Chande Momentum Oscillator is above +50 and oversold when it is below -50. Many technical traders add a 10-period moving average to this oscillator to act as a signal line. The oscillator generates a bullish signal when it crosses above the moving average and a bearish signal when it drops below the moving average. The oscillator can be used as a confirmation signal when it crosses above or below the 0 line. For example, if the 50-day moving average crosses above the 200-day moving average (golden cross), a buy signal is confirmed when the Chande momentum oscillator crosses above 0, predicting prices are headed higher. Trend strength can also be measured using the Chande momentum oscillator. In this methodology, the oscillator’s value denotes the strength or weakness of the expected trend.
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.
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