Chande Momentum Oscillator (CMO)

Definition

The Chande Momentum Oscillator is a technical momentum indicator and was designed specifically to track the movement and momentum of a security. The oscillator calculates the difference between the sum of both recent gains and recent losses, then dividing the result by the sum of all price movement over the same period (usually defined as 20 periods).

History 

The Chande Momentum Oscillator was invented by Tushar Chande and first introduced in 1994 in his book, “The New Technical Trader” written with the help of his colleague, Stanley Kroll. Chande and Kroll also worked together in developing the Chande Kroll Stop.

Calculations

1. Start by calculating the sum of the higher closes over “n” periods.
2. Then, calculate the sum of the lower closes over “n” periods.
3. Next, go ahead and subtract the sum of the lower closes over “n” periods from the sum of the higher closes over “n” periods.
4. Continue by adding the sum of the lower closes over “n” periods to the sum of the higher closes over “n” periods.
5. Divide 4 from 3 and then multiply by 100.
6. Plot the result on your chart and proceed with trading.

Takeaways

From the start, traders should be aware of the time frame they choose when using the Chande Momentum Oscillator. Signals are greatly affected by this decision.

When focusing on your chart settings and applying indicators and strategies to begin your trading, keep in mind that pattern recognition often generates more reliable signals when compared with absolute oscillator levels. 

In strong trending markets, it’s possible for overbought and oversold indicators to be considered less effective. When assessing your indicators, make sure to be aware of this point and proceed with your picks accordingly.

What to look for

The Chande Momentum Oscillator measures momentum on up and down days and doesn’t have the ability to smooth results, therefore triggering more frequent overbuys and oversells. This indicator oscillates between +100 and -100, but a security is not considered to be overbought until the oscillator is above +50. If the indicator oscillates below -50, then it is considered oversold.

It’s common to initiate a moving average (i.e. 10-period) to this oscillator to act as a signal line - if the oscillator crosses above the moving average, it generates a bullish signal. Similarly, if the oscillator moves below the moving average, it generates a bearish signal.

The Chande Momentum Oscillator can also be used to determine trend strength by analyzing the strength or weakness of the present market trend.

Summary

The Chande Momentum Oscillator is a technical momentum indicator and tracks the momentum of a security while also being able to determine market trend strength or weakness. It is a strong indicator to use to measure general gains and losses in the current market and has signals that are sensitive to pattern recognitions.