Chande Momentum Oscillator (CMO)

(CMO) is a technical indicator that can provide traders with valuable insights into momentum, trend reversals, and divergences.

TRADING INDICATORS

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1/29/20242 min read

CMO
CMO

What is the Chande Momentum Oscillator (CMO)?

The Chande Momentum Oscillator (CMO) is a technical indicator developed by Tushar Chande, a renowned trader and author. It is designed to measure the momentum of a financial instrument by comparing the sum of gains and losses over a specified period.

The CMO is classified as an oscillator, meaning it fluctuates between two extreme values, typically ranging from -100 to +100. A positive value indicates bullish momentum, while a negative value suggests bearish momentum.

How Does the CMO Work?

The calculation of the CMO involves several steps:

  1. Calculate the difference between the current closing price and the closing price n-periods ago.

  2. Separately sum the gains and losses over the specified period.

  3. Calculate the raw momentum by subtracting the sum of losses from the sum of gains.

  4. Calculate the absolute sum of gains and losses.

  5. Calculate the CMO by dividing the raw momentum by the absolute sum of gains and losses and multiplying by 100.

The resulting value is the Chande Momentum Oscillator, which can be plotted on a chart to identify potential trend reversals, overbought or oversold conditions, and divergences.

Interpreting the CMO

Expert traders utilize various techniques to interpret the Chande Momentum Oscillator effectively. Here are some key insights:

Overbought and Oversold Conditions

When the CMO reaches extreme levels, it indicates overbought or oversold conditions. A reading above +50 suggests overbought conditions, indicating a potential reversal or correction in the price. Conversely, a reading below -50 suggests oversold conditions, signaling a possible price rebound.

Trend Reversals

The CMO can help identify potential trend reversals. When the oscillator crosses above +50, it suggests a shift from bearish to bullish momentum, indicating a possible uptrend. Conversely, when the oscillator crosses below -50, it suggests a shift from bullish to bearish momentum, indicating a possible downtrend.

Divergences

Divergences between the CMO and the price action can provide valuable insights. Bullish divergence occurs when the price makes a lower low, but the CMO makes a higher low, indicating potential bullish momentum. On the other hand, bearish divergence occurs when the price makes a higher high, but the CMO makes a lower high, suggesting potential bearish momentum.

Advanced Trading Techniques with CMO

Expert traders often combine the Chande Momentum Oscillator with other technical indicators to enhance their trading strategies. Here are a few advanced techniques:

CMO and Moving Averages

Combining the CMO with moving averages can provide valuable confirmation signals. For example, when the CMO crosses above its moving average, it can be a bullish signal, indicating a potential uptrend. Conversely, when the CMO crosses below its moving average, it can be a bearish signal, indicating a potential downtrend.

CMO and Volume

Volume can be a powerful indicator when used in conjunction with the Chande Momentum Oscillator. When the CMO reaches extreme levels (overbought or oversold) and is accompanied by high volume, it strengthens the signal, increasing the likelihood of a price reversal or continuation.

CMO and Support/Resistance Levels

Support and resistance levels play a crucial role in technical analysis. When the CMO reaches extreme levels (overbought or oversold) near a significant support or resistance level, it reinforces the potential reversal or continuation, providing a higher probability trade setup.

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