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.
Calculation of the Chande Momentum Oscillator (CMO)
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.
How to use CMO in trading?
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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| Trading with CMO's crossing zero line in EUR/USD chart |
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:
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| CMO can be used to identify OB and OS conditions in EUR/GBP chart |
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:
 |
| Using CMO divergences in AUD/USD |
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.