Chande Momentum Oscillator (CMO)
tl;dr
The Chande Momentum Oscillator (CMO) helps traders measure the momentum of an asset and spot overbought or oversold conditions. It is calculated by comparing the sum of gains and losses over a period. A CMO above +50 indicates an uptrend and potential overbought conditions, while below -50 suggests a downtrend and oversold conditions. It can be used to spot potential reversals, confirm trends, and identify overbought and oversold conditions. Combining the CMO with other indicators can enhance trading decisions.
Definition.
A momentum oscillator that measures the difference between the sum of gains and the sum of losses over a specified period.
Real-World Example.
The Chande Momentum Oscillator (CMO) is a technical analysis tool designed to measure the momentum of an asset. It is used to determine overbought or oversold conditions by comparing the number of up and down days over a specific period. This indicator helps traders spot potential trend reversals and gauge the strength of a trend.
For example, let’s say you are tracking a stock that has been steadily rising for the past few weeks. As the stock approaches a peak, you notice that the CMO has crossed into the overbought zone (above +50). This suggests that the stock may be overextended, and a correction could be near. On the other hand, if the CMO falls below -50 during a downtrend, it signals the possibility of the stock becoming oversold, which could indicate that a rebound or reversal might be coming.
How the Chande Momentum Oscillator Works.
- Calculation: The Chande Momentum Oscillator is calculated by taking the difference between the sum of the gains and losses over a specified period (typically 14 days), and dividing it by the sum of gains and losses over that same period. The formula is: CMO=(Sum of gains over n periods)−(Sum of losses over n periods)(Sum of gains over n periods)+(Sum of losses over n periods)×100\text{CMO} = \frac{(\text{Sum of gains over n periods}) – (\text{Sum of losses over n periods})}{(\text{Sum of gains over n periods}) + (\text{Sum of losses over n periods})} \times 100
- Gains are the positive changes in price from one day to the next.
- Losses are the negative changes in price from one day to the next.
- Interpretation:
- Above +50: When the CMO is above +50, it suggests the asset is in an uptrend and could be in an overbought condition.
- Below -50: When the CMO is below -50, it suggests a downtrend and the asset might be in an oversold condition.
- Zero Line Cross: When the CMO crosses the zero line from negative to positive, it can signal a potential buy opportunity, and when it crosses from positive to negative, it can signal a potential sell opportunity.
- Overbought and Oversold Conditions:
- Overbought: When the CMO exceeds +50, it indicates that the price may have risen too far too quickly, and a pullback or reversal could be likely.
- Oversold: When the CMO drops below -50, it shows that the asset may have fallen too quickly, and a reversal to the upside could be on the horizon.
- Divergence:
- Bullish Divergence: If the price is making new lows, but the CMO is not confirming this by also reaching new lows, this is a bullish divergence and could signal a potential upward reversal.
- Bearish Divergence: If the price is making new highs, but the CMO fails to confirm with higher readings, this is a bearish divergence and could indicate the start of a downtrend.
How to Use the Chande Momentum Oscillator in Trading.
- Spotting Reversals:
- Use the CMO to identify potential reversals. If the CMO is above +50 and starts to move downward, it could indicate the end of an uptrend and the start of a downtrend. Conversely, if the CMO is below -50 and begins to move upward, it may signal the end of a downtrend and the start of an uptrend.
- Confirming Trends:
- A CMO that stays above +50 for an extended period suggests that an uptrend is strong. Similarly, a CMO consistently below -50 indicates a strong downtrend.
- Identifying Overbought and Oversold Conditions:
- Look for overbought conditions when the CMO is above +50. This could be a sign to exit a long position or consider shorting.
- Look for oversold conditions when the CMO is below -50, which could signal an opportunity to enter a long position or exit a short position.
- Combine with Other Indicators:
- Use the CMO in combination with other indicators like RSI, MACD, or moving averages to confirm signals. For example, if the CMO is showing overbought conditions and RSI is also above 70, it may be a stronger signal to exit or short.
- Divergence Analysis:
- Watch for divergences between the CMO and the price chart. If the price is making new highs but the CMO is not confirming these highs, it may be a sign that the momentum is weakening, and a reversal could be imminent.
