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Chande
Momentum Oscillator
Description
The
Chande Momentum Oscillator (CMO) was developed by
Tushar Chande. A
scientist, an inventor, and a respected trading
system developer, Mr. Chande developed the CMO to
capture what he calls “pure momentum".
For more definitive information on the CMO
and other indicators we highly recommend the book The
New Technical Trader by Tushar Chande and
Stanley Kroll.
The
CMO is closely related to, yet unique from, other
momentum oriented indicators such as Relative
Strength Index, Stochastic,
Rate-of-Change,
etc. It is
most closely related to Welles Wilder’s RSI, yet
it differs in several ways:
-
It
uses data for both up days and
down days in the numerator, thereby directly
measuring momentum.
-
The
calculations are applied on unsmoothed
data. Therefore,
short-term extreme movements in price are not
hidden. Once
calculated, smoothing can be applied to the
CMO, if desired.
- The
scale is bounded between +100 and -100,
thereby allowing you to clearly see changes in
net momentum using the 0 level.
The bounded scale also allows you to
conveniently compare values across different
securities.
Interpretation
The
CMO can be used to measure several conditions.
Overbought/oversold:
The primary method of interpreting the
CMO is looking for extreme overbought and oversold
conditions. 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. Likewise,
at -50, down-day momentum is three times the
up-day momentum.
These levels correspond to the 70/30 levels
on the RSI indicator.
You
could also establish overbought/oversold entry and
exit rules by plotting a moving average trigger
line on the CMO. For
example, if you are using the default 20-period
CMO, a 9-period moving average may serve as a good
trigger line. Buy
when the CMO crosses above the 9-period trigger
line; sell when it crosses below.
Trendiness:
The CMO (much like the VHF
indicator), can also be used to measure the
degree to which a security is trending.
The higher the CMO, the stronger the trend.
Low values of the CMO show a security in a
sideways trading range.
You
may find the CMO helpful in establishing the entry
and exit rules of a trend following system.
Enter when the CMO is high and exit when it
moves lower.
Divergence.
Although not specifically mentioned in
Mr. Chande’s book, you could also look for
divergence between the CMO and the price, as is
often done with other momentum indicators.
See the discussion
about divergence in the Interpretation section
of RSI.
Other:
Although not specifically mentioned in
Mr. Chande’s book, you may also look for chart
formations (head and shoulders, rising wedges,
etc.), failure swings, and support/resistance.
See the discussion
on these methods in the Interpretation section
of RSI. |
