The Chande Momentum Oscillator (CMO) is a technical indicator developed by Tushar Chande to measure the momentum of a financial instrument. Unlike other momentum oscillators, such as the Relative Strength Index (RSI) or the Stochastic Oscillator, the CMO uses a different calculation method that aims to provide more accurate signals. In this article, we will explore the intricacies of the Chande Momentum Oscillator, its calculation, interpretation, and how traders can effectively use it in their trading strategies.
Traders use the Chande Momentum Oscillator to identify potential overbought or oversold conditions, trend reversals, and divergence between price and momentum. Here’s how chande momentum oscillator traders interpret CMO signals:
Overbought/Oversold Conditions: Extreme values of the CMO, either significantly above +50 or below -50, may indicate overbought or oversold conditions, respectively. Traders look for these extremes to anticipate reversals or corrections in price.
Trend Reversals: Changes in the direction of the CMO can signal potential trend reversals. For example, if the CMO has been in negative territory and crosses above zero, it may indicate a potential bullish reversal. Conversely, if the CMO has been positive and crosses below zero, it may indicate a potential bearish reversal.
Divergence: Divergence occurs when the direction of price movement differs from the direction of the CMO. Bullish divergence occurs when prices are making lower lows, but the CMO is making higher lows, indicating potential bullish reversal. Bearish divergence occurs when prices are making higher highs, but the CMO is making lower highs, indicating potential bearish reversal.
