How to Use Chande Momentum Oscillator: “The Best Momentum Indicator”

While price action strategies and some new methods, like Smart Money Concepts, have gained massive popularity over the last few years, there are still indicators worth considering. Adding a good indicator like the Chande Momentum Oscillator might benefit your trading arsenal. In this article, we will focus on this underrated oscillator.

First, we begin by briefly introducing the Chande Momentum Oscillator. Then, we analyze how the Chande Momentum Oscillator works and how you can calculate it. Finally, we analyze the benefits and limitations associated with using this indicator to help readers decide whether they want to utilize CMO or not.

Check out our guide on how to use the Supertrend Indicator.

What Is Chande Momentum Oscillator?

The Chande Momentum Oscillator (CMO) is a technical momentum indicator developed by Tushar Chande in his 1994 book, “The New Technical Trader.” He designed CMO to identify overbought and oversold conditions in the market. Therefore, it helps traders determine potential entry and exit points for their trades.

To calculate the Chande Momentum Oscillator, you should use a specific formula. It involves comparing the sum of recent gains and losses to the sum of all price movements over a defined period. We will cover the calculations in more detail.

You can use CMO on various trading platforms. For instance, Chande Momentum Oscillator mt4 download is possible with an easy Google search. TradingView also you to add the Chande Momentum Oscillator indicator to your price charts for free. Traders usually add CMO to a pane below price charts. It is used simultaneously with candlesticks, as demonstrated in the chart below.

How to Calculate the Chande Momentum Oscillator?

To calculate the CMO, you must first determine the price gains and drops over a specified period. You should typically use each day’s closing prices. You can calculate gains as the positive difference between the current and previous closing prices. In contrast, losses are the negative difference between the current and previous closing prices.

Next, you should calculate the sum of all gains and losses over the specified period. The common period is 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.

Here is the Chande Momentum Oscillator formula:

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

The resulting value will range between -100 and 100. It would clearly indicate the market’s momentum.

How to Use the Chande Momentum Oscillator?

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.

Take a look at the chart below for overbought and oversold examples:

Traders can use the CMO to generate other buy and sell signals. For instance, 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. On the other hand, 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.

What Are the Advantages and Disadvantages of CMO?

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 makes it applicable to various financial instruments across different timeframes, such as stocks, commodities, and currencies.

Yet, 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, market conditions can influence the CMO’s effectiveness, 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.

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Conclusion

The trading landscape has seen a surge in the popularity of price action strategies and innovative approaches like Smart Money Concepts. Yet, there remains value in exploring traditional indicators such as the Chande Momentum Oscillator (CMO). This underappreciated oscillator, designed by Tushar Chande, proves its worth in identifying overbought and oversold conditions, aiding traders in pinpointing potential entry and exit points.

By calculating the CMO through a meticulous formula involving gains and losses over a specified period, you can use its insights to gauge market momentum. However, it’s essential to acknowledge both the advantages and disadvantages associated with the CMO. While it excels in providing valuable signals and versatility across various financial instruments, traders should exercise caution. CMO can potentially produce false signals, and market conditions can impact its effectiveness. Therefore, integrating the Chande Momentum Oscillator into a well-rounded trading strategy complemented by other analysis tools is recommended.