Back to website
Lane’s Stochastic Oscillator Introduction to Klinger Oscillator
3 mins read

Chande Momentum Oscillator

Introduction

The Chande Momentum Oscillator (CMO) is a technical momentum indicator developed by Tushar Chande in his 1994 book, “The New Technical Trader.” It is designed to identify overbought and oversold conditions in the market, helping traders determine potential entry and exit points for their trades. The CMO is calculated using a specific formula, which involves comparing the sum of recent gains and losses to the sum of all price movements over a defined period.

Chande Momentum Oscillator

Calculation of the Oscillator

Sum of recent gains and losses

To calculate the CMO, a trader must first determine the gains and losses over a specified period, typically using the closing prices of each day. Gains are calculated as the positive difference between the current and previous closing prices.

In contrast, losses are calculated as the negative difference between the current and previous closing prices.

Ratio of gains to total price moves

Next, the sum of all gains and the sum of all losses are calculated over the specified period, commonly set to 14 or 20 days. The CMO is then computed by taking the difference between the sum of gains and the sum of losses and dividing the result by the sum of all price movements (both gains and losses) over the same period:

CMO = [(Sum of Gains - Sum of Losses) / (Sum of Gains + Sum of Losses)] * 100

The resulting value will range between -100 and 100, clearly indicating the market’s momentum.

Example scanners based on Chande Momentum Oscillator

The Chande Momentum Oscillator can be used in Scanning the market. To see how exactly it can be used in this way, we provide the following samples. Both scanners search the market for stocks using this indicator.

"TS: Chande MO Long" scanner by Kevin Shah
charts.trendspider.com
“TS: Chande MO Long” scanner by Kevin Shah
"TS: Chande MO Short" scanner by Kevin Shah
charts.trendspider.com
“TS: Chande MO Short” scanner by Kevin Shah

Interpretation

Overbought and oversold levels

The CMO can help traders identify overbought and oversold conditions in the market. Generally, a CMO value above +50 indicates an overbought condition, suggesting the asset may be due for a price correction.

Conversely, a CMO value below -50 indicates an oversold condition, implying that the asset may be undervalued and due for a price rebound.

Trading signals

Buy and sell signals

Traders can use the CMO to generate buy and sell signals. A buy signal occurs when the CMO crosses above a lower threshold (e.g., -50 or -30), indicating that the asset is moving from an oversold to a neutral or bullish territory. A sell signal occurs when the CMO crosses below an upper threshold (e.g., +50 or +30), suggesting that the asset is transitioning from an overbought to a neutral or bearish territory.

Advantages

The Chande Momentum Oscillator offers several advantages to traders, including its ability to identify overbought and oversold conditions, generate trading signals, and provide insights into market momentum. Its versatility allows it to be applied to various financial instruments across different timeframes, such as stocks, commodities, and currencies.

Limitations

Despite its benefits, the Chande Momentum Oscillator also has some limitations. Like other technical indicators, it may produce false signals or lagging information, leading to potential trader losses.

Additionally, the CMO’s effectiveness can be influenced by market conditions, with some environments being more conducive to its use than others. As a result, traders should be cautious when relying solely on the CMO for decision-making and consider incorporating other technical tools and fundamental analysis to strengthen their trading strategies.

Combining with other indicators

To improve the accuracy and reliability of trading signals, traders can combine the CMO with other technical indicators. For instance, trend-following indicators, such as moving averages or the Average Directional Index (ADX), can be used to confirm the overall market direction.

Additionally, traders can use support and resistance levels or chart patterns to identify potential entry and exit points more accurately. Combining the CMO with other indicators can help traders filter out false signals and enhance their overall trading performance.

Example strategy based on Chande Momentum Oscillator

The Chande Momentum Oscillator can be used in Testing Strategies. To see how exactly it can be used in this way, we provide the following sample. The strategy tests buying and selling rules built around this indicator.

"TS: Chande MO Long" strategy by Kevin Shah
charts.trendspider.com
“TS: Chande MO Long” strategy by Kevin Shah

The Bottom Line

The Chande Momentum Oscillator is a valuable tool for traders looking to gauge market momentum and identify potential trading opportunities. The CMO clearly indicates overbought and oversold conditions by calculating the difference between the sum of recent gains and losses and dividing it by the sum of all price movements. Although the indicator has limitations, such as the potential for false signals and lagging information, combining it with other technical tools and fundamental analysis can help traders develop more robust and effective trading strategies.

Related:

  • Moving Averages

    Introduction to Moving Averages 

    Moving averages are one of the financial industry’s most widely used technical analysis tools. Essentially, a moving average is a calculation used to analyze the average price of an asset over a given period. This calculation is based on a certain number of past prices that are averaged to provide an indication of the direction …
    Introduction to Moving Averages
  • Technical Indicators

    Demystifying Technical Indicators: Understanding the Role of Technical Indicators in Trading 

    Introduction to Technical Indicators Purpose of Technical Indicators in Trading Technical indicators are essential tools for traders to help them better understand price movements, trends, and potential trading opportunities. They are mathematical calculations based on historical price data, volume, and/or other factors that are used to forecast future price movements. The Development of Technical Indicators …
    Demystifying Technical Indicators: Understanding the Role of Technical Indicators in Trading
Lane’s Stochastic Oscillator Introduction to Klinger Oscillator