Chande Momentum Oscillator
This lesson will cover the following
- Definition
- Interpretation
Developed by Tushar Chande, the Chande Momentum Oscillator is used to gauge ‘pure momentum’. It bears similarities to other momentum indicators, such as the Stochastic Oscillator, Rate of Change, and the Relative Strength Index, but its unique features make it a handy tool in a trader’s toolkit.
The CMO measures momentum directly, using data from both bullish and bearish days in the numerator. Unsmoothed data reveals hidden short-term fluctuations, but smoothing can also be applied. Unlike most oscillators, which range on a scale between 0 and 100, the CMO’s values are bound between 100 and -100, with overbought and oversold levels typically considered above 50 and below -50, respectively.
Thus, like other oscillators, the Chande Momentum Oscillator’s main goal is to identify overbought and oversold levels, which tend to precede price reversals and, consequently, generate entry signals. The screenshot below shows the indicator’s visualisation on a trading platform.
- Trade Forex
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- Trade Stocks
- Regulation: NFA
- Leverage: Day Margin
- Min Deposit: $100
However, the CMO’s application is not limited to momentum reversal predictions alone. It measures the trend a currency, commodity, or stock is exhibiting – the further away its value is from the zero level, the stronger the bullish or bearish trend. Conversely, when the indicator hovers near the middle of the scale, it implies that the market is trading sideways (range-bound).
Additionally, the CMO can be used to generate entry signals – not just when it crosses the overbought/oversold areas – by adding a moving average to the indicator. When the indicator’s line crosses the moving average from below and moves higher, it generates a buy signal, and vice versa.
Like other momentum indicators, Chande’s Momentum Oscillator can also be traded on the basis of divergences with price action. This is done in a similar way to trading divergences with the Relative Strength Index, Stochastic Oscillator and so on.