The Chande Momentum Oscillator (CMO) is a momentum indicator developed by Tushar Chande and introduced in his book The New Technical Trader in 1994. The CMO is designed to measure what Chande calls ‘pure momentum’ and return data as the oscillating line between +100 and -100. This is similar to the Relative Strength Index (RSI) except that it measures momentum on a rising and falling day.
CMO also does not use internal smoothing and therefore does not obscure short-term extreme motion in momentum. As a result, CMOs often reach more areas purchased and sold more regularly than momentum indicators, such as RSI, which has an internal smoothing.
The Chande Momentum Oscillator (CMO) is calculated by dividing the amount of momentum during several days of rising and the momentum of the day down with the difference of day momentum rising and the momentum of the day down. The formula for the indicator is:
CMO = 100 x (Sup – Sdn) / (Soup + Sdn)
where Sup is the sum of the momentum of the rising day in the analyzed period and Sdn is the number of day momentum down in the analyzed period. The default period is the last 9 days.
CMOs have an atmosphere between +100 and -100 and the underlying stock or pair is considered overbought when its CMO is above 50 and oversold when CMO is below -50. Thus, when the CMO moves above +50 it is considered bearish and is not advisable to enter long position, while moving below the -50 line is considered bullish and is not recommended to enter the short position.
Motion penetrating upwards above the midline of CMO, ie penetrating upwards 0 can also serve as a confirmation of bullish signals, when the CMO moves above 0; or bearish signal when CMO move down 0.
Chande also suggests adding a simple 10-day moving average from the CMO to provide trading signals before the CMO crossed the line 0. The potential entry signal for long trading is generated when the CMO crosses above SMA (10), and potential entry signals for short trading will be generated when CMO traverses down 10 days of high school.
Like all oscillators, buy and sell signals can also be generated by positive or negative divergences between the CMO and the underlying price.
s1=SMA(cmo1) with Length as period,
s2=SMA(cmo2) with Length as period,
cmo1 – sum of positive deviation of price,
cmo2 – sum of negative deviation of price.