Tushar Chande invented the CMO Indicator (Chande Momentum Oscillator) as a respected trading system developer.
Tushar Chande is a famous American technical analyst.
In his books “Beyond Technical Analysis” and “The New Technical Trader by Tushar Chande and Stanley Kroll” he describes a series of oscillators that can be used to analyze different financial markets.
The CMO Indicator is a momentum indicator and is part of the oscillator family.
Oscillators help identify points of excess rise or fall. They can also help the trader identify moments of weakening of the dominant trend.
Oscillators are called oscillators because their value oscillates between a minimum and a maximum.
They can also be used in the side market phases.
In finance, momentum means the market strength obtained by sampling the rate of change in prices concerning their actual levels.
What is the CMO Indicator
The Chande Momentum Oscillator, as we have already said, is a Momentum indicator.
However, the CMO Indicator differs from the other momentum indicators because it captures extreme short-term movements better.
You can use the CMO ranges from +100 to -100, and the zero-level crossing to identify momentum changes.
Chande’s Momentum is effortless to calculate.
It’s just the difference between closing the current bar, and closing n bars does.
We can calculate this difference in points or percentages.
In the first case, we obtain the Momentum, in the second the Percent Change.
The CMO excludes the session minima and maxima from the calculation; this could be a significant disadvantage because it is a fundamental fact.
How to calculate the Chande Momentum Oscillator
The formula of this indicator (CMO) is very similar to that of the RSI Indicator.
CMO = ((SU – SD)/(SU + SD)) * 100
SU = sum of the positive moment (when the closing price is higher than the closing price of the previous session)
SD = sum of negative momentum (i.e., when the closing price is lower than the closing price of the previous session)
You can also calculate the Chande Momentum by dividing the “classic” momentum by the momentum in absolute value, i.e.:
CMO= (MOMENTUM) / (|MOMENTUM|)
This oscillator usually uses multiples of 5 days (in particular, 10 or 15 days).
The indicator thus takes one or more trading weeks as the basis for calculation;
How to use the CMO Indicator
The CMO Indicator allows you to identify the directionality of the market.
When momentum is positive, it signals rising prices, while when it is negative, it indicates that prices are falling.
The change from the zero lines indicates the transition from up to down and vice versa.
A growing CMO must accompany a healthy upward trend. The oscillator must, therefore, confirm the increase in prices;
A downward trend, on the contrary, must be accompanied by a decreasing CMO. In this case, the oscillator must confirm the fall in prices;
The CMO oscillates in a range between +100 and –100 with the overbought and oversold bands set at +50 and –50 points, respectively.
As with the RSI Indicator, values higher than 50 and less than -50 indicate a phase of overbought or oversold that could alert us to a stop or reversal of the current trend.
Through the CMO Oscillator, it is possible to search for possible divergences with the price movement.
There will be a positive divergence when prices, within a downward trend, draw decreasing minima while the oscillator draws increasing minima;
On the other hand, there will be a downward divergence when prices, within an upward trend, will draw increasing highs while the oscillator will draw decreasing highs;
We can also use a moving average calculated on the values of the indicator and not on those of the price.
In this case, the moving average tends to follow the oscillator, placing itself below it during an upward phase, while remaining above it in the downwards period.
When CMO crosses its moving average and crosses it downwards, it signals a negative moment.
While when he crosses his moving average upwards, he signals a positive moment.