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Chande's Momentum Oscillator

The Chande Momentum Oscillator (CMO) was developed by Tushar Chande and explained in the book "The New Technical Trader" by Tushar Chande and Stanley Kroll. The CMO was designed to calculate what Chande refers to as "pure momentum". The CMO is similar to, yet unique from, other momentum-oriented indicators such as the RSI, Stochastics, and Rate-of-Change.

The CMO uses data for both up days and down days in the numerator, thereby directly measuring momentum. The calculations are performed on unsmoothed data. This allows for short-term extreme movements to be less hidden. However, smoothing can be applied to the CMO if desired. The scale is bound between +100 and -100 thus allowing the user to clearly see changes in net momentum using the 0 level as a balance point.

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Interpretation

The Chande Momentum Oscillator can be used to measure several conditions:

Identifying Overbought/oversold Conditions: Looking for extreme overbought or oversold conditions is the primary method of interpreting the CMO. As a general rule, Mr. Chande quantifies an overbought level at +50 and the oversold level at -50. At +50, up-day momentum is three times the down-day momentum; At -50, down-day momentum is three times the up-day momentum. These levels essentially correspond to the common 70/30 levels used with the RSI indicator.

Using a CMO Trigger Line: Trade entry and exit rules can be created by plotting a moving average of the CMO as a "trigger" line. For example, using the default 20-period CMO, a 9-period moving average may serve as agood trigger line. Buy when the CMO crosses above the 9-period trigger line; sell when it crosses below it.

Trendiness: The CMO can also be used to measure the degree of trendiness an instrument exhibits. Higher CMO values correspond to betting trendiness while lower values of CMO indicate a possible trading range.

Divergence: Although not specifically mentioned in Chande's book, looking for divergence between the CMO and the instrument's price may also be a viable strategy as it often is with other similar momentum-oriented indicators.

The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Suggested reading materials are created by outside parties and do not necessarily reflect the opinions or representations of Capital Market Services LLC. Please refer to our risk disclosure page for more information.