Hi friends. Trading commissions in Forex are generally lower than in other financial markets. We can trade anytime from anywhere in the world. This market offers us an attractive opportunity to generate high returns with a low capital, without the need for a lot of money to trade. However, it also comes with its risks. When trading in financial markets, we use technical analysis. Technical indicators, a part of technical analysis, are among the most widely known and used tools by almost all traders. Technical indicators are the most important tools we have for predicting future price movements. The Chande Momentum Oscillator (CMO) is one of these indicators.
What is the Chande Momentum Oscillator (CMO)?
The Chande Momentum Oscillator (CMO) is one of the technical indicators we use when trading in the financial market. This indicator is a momentum indicator developed by Tushar Chande in 1994 to measure the momentum of price changes in any financial asset. The CMO measures the momentum of price movements and is graphed as a line ranging from 0 to 100. The main purpose of CMO is to help determine the speed and direction of asset prices. It is typically used with a 14-period setting, although different periods can be preferred. This oscillator generates both positive and negative values and helps determine the direction of price movements. When prices are rising, the value of CMO increases, and when prices are falling, the value of CMO decreases.
Chande Momentum Oscillator Calculation
The calculation of the Chande Momentum Oscillator (CMO) is
performed automatically by the indicator. First, a period (usually 14 periods
are used, but we can set this value according to our preference) is chosen. For
each period, positive and negative price changes are calculated. Positive price
changes represent the total of days when the daily closing price increased
compared to the previous day, while negative price changes represent the total
of days when the daily closing price decreased compared to the previous day.
The Chande Momentum Oscillator is then calculated using the following formula,
and the resulting value is expressed as a percentage by multiplying it by 100:
CMO = (SU – SD) / (SU +
SD) x 100
Here:
- "SU," which stands for "Sum(Positive Changes)," represents the total of positive price changes.
- "SD," which stands for "Sum(Negative Changes)," represents the total of negative price changes.
Generally, the CMO value ranges between +100 and -100, with 0 as the baseline. CMO values above +50 are interpreted as overbought, while CMO values below -50 are considered oversold. CMO is used to assess the momentum of prices and predict trend changes. If you want to understand price changes, the Chande Momentum Oscillator formula is a great tool. It is easy to use and can show when prices go up or down. The formula looks at the difference between gains and losses over a period of time.
A lot of traders like the Chande Momentum Oscillator formula because it is simple. You just take the sum of all up days, subtract the sum of down days, and divide by the total number of periods. This gives a number that can be read easily on a chart.
You can use the Chande Momentum Oscillator formula to see if the market is moving faster or slower. Some signals appear when the value is high, and others when it is low. By watching this, you can decide when it may be a good time to buy or sell. Even though it is simple, the Chande Momentum Oscillator formula can give you clear insights. You don't need anything fancy to start. Just learn the formula, apply it to your charts, and see how it reacts to price changes.
What is the Range of Chande Momentum Oscillator?
The Chande Momentum Oscillator usually moves between -100 and +100. This range shows when prices are rising or falling. The chart can be adjusted using the Chande Momentum Oscillator settings to get a clearer picture. The Chande Momentum Oscillator settings allow changes to the period. A shorter period shows faster movements, while a longer period highlights bigger trends. Adjusting the Chande Momentum Oscillator settings makes the chart easier to read and follow.
The scale is important too. Values near +100 indicate strong price rises, and values near -100 indicate strong drops. Observations become more useful when the Chande Momentum Oscillator settings are set correctly. It is possible to experiment with different periods. Changing the Chande Momentum Oscillator settings can show how the oscillator reacts to price changes. Trying several settings gives a better understanding of the market's behavior. In addition, the Chande Momentum Oscillator settings provide flexibility for different strategies. Some periods show short-term changes, while others show longer trends. Adjusting these settings helps make patterns on the chart easier to see.
Finally, learning the Chande Momentum Oscillator settings helps in reading the chart quickly. Each change gives a new view and makes the oscillator more useful for noticing price moves.
How to Use Chande Momentum Oscillator in Trading?
The Chande Momentum Oscillator can show when prices start to change direction. If the line goes up quickly, it may mean buyers are active. If the line goes down fast, sellers may be in charge. Small movements around the middle line can show hesitation in the market. Watching these shifts helps to see when a trend might begin or end. This tool works on any chart and can be used for short or long periods. Just following the line gives a simple way to understand price moves.
A Chande Momentum Oscillator trading strategy offers a simple way to see price movements and trend changes. This strategy uses the CMO line to find buy and sell opportunities, looking at divergences, overbought, and oversold levels. Using a structured Chande Momentum Oscillator trading strategy allows traders to follow price changes in a more organized and stress-free way.
Applying a Chande Momentum Oscillator trading strategy can be done on any chart and for different time frames. It gives signals for entering and exiting positions based on how the CMO interacts with price. Now let's go over a few example strategies:
Zero Line Crossover Strategy:
CMO values typically fluctuate between 0 and ±100. Positive
values indicate an uptrend, while negative values indicate a downtrend. The
crossing of the zero line by CMO can be used as a trading signal. For example,
if CMO crosses below the zero line from above, this can be interpreted as a
sell signal, and conversely, if it crosses above the zero line, it can be seen
as a buy signal. An example of this can be seen in the 4-hour Euro/US Dollar
chart below:
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| Chande Momentum Oscillator Zero Cross on EUR/USD |
On the chart, it is easy to see how CMO reacts to price movements. When the line crosses zero, the direction of the trend changes clearly. This visual example makes the buy and sell points simple to follow.
Overbought/Oversold Strategy:
Additionally, CMO can be used to identify overbought (ob) and
oversold (os) conditions. Generally, if CMO is above +50, it is considered
overbought, and if CMO is below -50, it is considered oversold. Therefore, if
CMO crosses from below -50 to above -50, it can be interpreted as a buy signal,
indicating a possible reversal in trend, and a BUY order can be placed.
Conversely, if CMO crosses from above +50 to below +50, it can be interpreted
as a sell signal, indicating a possible reversal in trend, and a SELL order can
be placed. An example of this is shown in the 4-hour Euro/British Pound chart
below:
 |
| CMO shows Overbought and Oversold zones on EUR/GBP |
The chart shows how the Chande Momentum Oscillator moves in overbought and oversold zones. Crossings above +50 or below -50 show trend changes and make buy and sell points easy to see.
Divergence Strategy:
Furthermore, we can take advantage of divergences between
the Chande Momentum Oscillator (CMO) and the price chart to initiate buy and
sell trades. Similar to other indicators, with CMO, we can trade using all types of divergences. In the example 4-hour Australian Dollar/US Dollar chart
below, we can see that Long positions work effectively with Positive (Bullish) divergence, while Short positions work well with Negative (Bearish) divergence:
 |
| Trading AUD/USD with CMO Divergences |
The chart illustrates divergences between the Chande Momentum Oscillator and the price. When the CMO rises while the price is falling, this is called a bullish divergence, and it can indicate a possible upward move. Conversely, when the CMO falls while the price is rising, this is called a bearish divergence, suggesting a possible downward move.
Divergences can be used to spot areas where trends may change. In the example 4-hour Australian Dollar/US Dollar chart, bullish divergences align with points where buying positions performed well, and bearish divergences align with points where selling positions worked effectively. Following these divergences can help understand how price and CMO interact, making trend changes easier to notice.
! It is important to remember that the CMO should not be used in isolation, but should be used in combination with other technical indicators. Overbought or oversold signals may not always be accurate on their own. CMO can yield more effective results when used in conjunction with other technical indicators. For instance, a signal indicating that CMO is in the overbought or oversold zone can be interpreted as a more reliable buy or sell signal if it is supported by other technical indicators. When trading in financial markets, it's a more reliable strategy to keep our positions small to reduce risk.