Chande Momentum Oscillator

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Introduction

Tushar Chande developed and wrote about The Chande Momentum Oscillator (CMO) in his book “The New Technical Trader”. The Chande Momentum Oscillator as the name infers is a momentum indicator in the same mould as the RSI and MACD but differs from these technical indicators in that in its calculation the CMO incorporates up and down days in both the numerator and denominator. The Chande Momentum Oscillator can be used by traders looking to identify overbought and oversold conditions as well as a tool to identify trends.

Formula

CMO =( [ ( Su-Sd ) ⁄ ( (Su-Sd ) ] ×100 )

Where:

Su = sum of the difference between current and previous closes on up days.

Sd = sum of the difference between current and previous closes on down days.

Su is the sum of the difference between today’s close and yesterday’s close. Sd represents the absolute value of the difference between today’s close and yesterday’s close on down days.
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Interpretation

The Chande Momentum Oscillator looks to capture price momentum strength and weakness by using up and down days in its calculation. The CMO indicator is created by calculating the difference between the sum of all recent gains and the sum of all recent losses and then dividing the result by the sum of all price movement over given time period. The result is banded indicator fluctuates between +100 and -100. The Chande Momentum Oscillator uses no smoothing techniques to reduce or hide any short-term volatility in price movements.

The Chande Momentum Oscillator (CMO) can be used to identify overbought conditions as the indicator value crosses above +50. Oversold conditions are identified when the indicator values crosses below -50.

The CMO can also be used confirm in trend confirmation. Trend direction can be confirmed when indicator values cross above or below the centre line. Bullish moves are confirmed when the indicator line crosses above the centre line from below. Bearish moves are confirmed when the indicator line crosses below the centre line from above.

Conclusion

The Chande Momentum Oscillator is a versatile momentum indicator that can be used by traders in a number of ways. The most common way to use the CMO indicator to identify overbought and oversold market conditions. By identifying extreme price conditions traders can reduce the probability from buying at or near term market tops and selling at or near term market lows. The Chande Momentum Oscillator can also help traders’ time entries and to trade in the direction of the trend by observing the indicator line behaviour around the middle line. As with all technical indicators the Chande Momentum Oscillator should not be used in isolation but used a one tool that is part of a larger comprehensive analysis.