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Tushar Chande developed the Chande Momentum Oscillator as a momentum indicator based on the Relative Strength Index formula. This indicator compares recent gains to losses, and identifies overbought and oversold levels.
Overbought and oversold levels often signal price reversals and provide entry signals, however an indicator which fails to breach these levels could signal a range market.
How It Works
Tushar Chande created the Chande Momentum Oscillator as a momentum indicator to measure price momentum on both bullish and bearish days, similar to RSI Oscillator but more robustly than StochRSI (StochRSI). However, unlike its counterpart, this indicator moves faster from price overbought to oversold than StochRSI, thus providing trading signals earlier than other momentum indicators. It was first discussed in 1994 book The New Technical Trader written by Chande and money management expert Stanley Kroll as described in 1994 book The New Technical Trader by Chande himself alongside money management expert Stanley Kroll. It first made its appearance as StochRSI did and moved more slowly from overbought/oversold conditions than its counterpart StochRSI counterpart which gave rise to trading signals much earlier.
Formula for this indicator is derived by adapting Relative Strength Index (RSI). Instead of dividing upward movement by total movement, CMO divides net movement by the up/down direction to make it more sensitive to trend; values below 50 indicate oversold conditions. Phemex offers this indicator so traders can use it in various ways to help identify overbought and oversold conditions more effectively.
As with any technical indicator, CMO requires some mathematical knowledge in order to use effectively. However, unlike many others indicators it can be applied to any currency pair or asset regardless of market direction, making it an indispensable tool for both day traders and swing traders alike.
To calculate an indicator, add a period, such as 9 days, to your chart. Select an oscillator level you would like as your signal line; typically this would be 50 but many traders may find that lower numbers such as 50 work better for them.
Your choice of timeframe will have an enormous effect on the accuracy of signals generated by CMO. A strong-trending market could generate numerous false signals while more choppy markets will provide few. Therefore, it is vitally important that traders can distinguish between signals and refrain from entering trades that don’t have sufficient momentum behind them.
When trading the CMO, it’s essential to identify divergences in signal lines. A bullish divergence occurs when one signal line crosses over the zero line; when two divergences exist- such as when price forms a lower peak while one signals form higher ones- they indicate that trends could possibly reverse themselves.
The Basics
Tushar Chande first developed and introduced this indicator in 1994 in his book, The New Technical Trader. Similar to Wilder’s relative strength index (RSI) and stochastic oscillator, but taking a slightly different approach – without smooth results and more frequently triggering overbought/oversold levels and thus more false signals – Tushar Chande developed and introduced this indicator with his book entitled, The New Technical Trader.
Calculates momentum on both up and down days, enabling it to respond more rapidly to changes in overall trend. Bound between +100 and -100, making it easy to identify peaks and troughs.
Formula for Calculating Closing Momentum Offset The formula for CMO calculation involves adding together the sums of higher closes over a given period with those from lower closes, subtracting, dividing by the custom n value set in your study and multiplying by 100. It can easily be changed using the drop-down menu in study settings if desired.
Though CMO can be used by itself, many traders like to combine it with other analyses. One common technique involves adding a moving average indicator to generate trade signals when the CMO crosses above or drops below its respective moving averages – for instance when CMO crosses above an MA, buy signals are generated while when CMO drops below its MA sell signals are issued.
Another way of using this indicator is to monitor any sign of divergence between an underlying security and its CMO, as this indicates it may no longer maintain its current momentum – often seen as an alarm bell and used as an opportunity for shorting security positions.
Traders can utilize the Chande Momentum Oscillator (CMO) indicator to detect overbought and oversold conditions in securities. As a general guideline, CMO levels between +50 and -50 indicate an overbought/oversold condition; however it should be remembered that indicators can still overshoot these thresholds; many traders add a moving average indicator instead and only trade when their moving average crosses above or below CMO oscillator indicator on chart.
The Strategy
The Chande Momentum Oscillator (CMO) is an underutilized but rare indicator that can help traders identify buying and selling opportunities. Created by Tushar Chande, an industry veteran with more than two decades of experience trading the stock market, its functionality resembles that of more commonly-known momentum indicators such as Relative Strength Index (RSI) or Stochastic Oscillator but its range bounded (+100 to -100).
Calculated by dividing the sum of all recent higher closes by all recent lower closes over a specified time period and multiplying that result by total price movement during that same time frame. The result of the calculation is then compared with thresholds defining overbought and oversold conditions; typically 20 days is used as the CMO indicator period. Traders typically look for signs when the CMO crosses above or below a 9-period moving average of the 20 period CMO displayed as a signal line, usually displayed above 50 levels. When the indicator reaches overbought levels above 50 it may present an excellent buying opportunity while reaching below-50 can present selling opportunities.
Traders frequently utilize the zero line to identify entry and exit points for trades. When an indicator nearing overbought levels indicates an asset is overvalued, this may be an ideal opportunity to short sell it and short it off at lower levels; conversely if CMO falls nearer oversold levels below 0, it may signal undervaluing and indicate buying opportunities in an investment opportunity.
Remembering the CMO as a momentum indicator and its potentially volatile nature is important for traders, so using other indicators, like moving averages or stochastics to help confirm your bias when trading is particularly helpful when using 1W, 1D, or 6H charts.
The Results
Chande Momentum Oscillator (CMO) serves to identify overbought and oversold levels in assets. An asset is considered overbought when its price crosses above zero line; conversely, when its price drops below it. When using CMO it is essential that traders select an ideal period; most platforms use 9 days as their default but many traders may find an extended timeframe more suitable to their trading style. It is advisable to spend some time testing various periods until finding one which best matches up with their trading style – once found it may take some time – until finding one which suits them both perfectly!
Traders can combine the CMO with other indicators to produce buy and sell signals. For example, they might apply a moving average to the indicator and look for cross-overs as trade triggers; or look out for divergences between it and price action that signal potential reversals in trend direction.
Calculating the CMO involves first adding together all lower closes with all higher closes, subtracted all lower closes from all higher closes, divided by 2, then added back onto total move period multiplied by 100 to get your CMO, displayed on a chart.
Tushar Chande developed the CMO as an extension of conventional momentum indicators described in his book, The New Technical Trader. It uses an approach more similar to Welles Wilder’s Relative Strength Index than to traditional Momentum indicator and can be used to detect overbought and oversold conditions in securities, as well as price divergences between indicators and assets; such as when the asset price rises while CMO falls. Also useful are divergence patterns; for instance when one asset declines while CMO rises; such occurrences signal negative momentum – potentially giving a good opportunity to short short the security.
