Chande Momentum Oscillator Indicator
An ideal oscillator for detecting momentum. Chande Momentum Oscillator is an incredible forex trading tool for detecting strong trend and impending reversals.
Description
Chande Momentum Oscillator (CMO) is one of the technical indicators developed by Tushar Chande. He explores this technical indicator in his book Beyond Technical Analysis. The indicator measures momentum on up and down days without smoothing the results, triggering more overbought and oversold penetrations. The whole idea is to use the indicator to open trades when the momentum is strong.
How Do You Read a Chande Momentum Oscillator Indicator?
The CMO oscillates between +100 and -100. An instrument is deemed overbought when the indicator is above +50 level and oversold when below -50.
Here is an interesting thing. You can use the Chande Momentum Oscillator to analyze any instrument, and it works pretty well in any time frame. However, it works best trading a trending market instead of a ranging market.
How to Use Chande Momentum Oscillator
Using the CMO indicator is straightforward. Start by identifying the position of the indicator line. When the indicator climbs above the zero line in a bullish market, it means the trend is gaining momentum. Therefore, you should consider opening a long position. Similarly, when the oscillator line drops below the zero line, it is an indication that bearish momentum is gaining traction, and you should consider opening a short position.
When the indicator hits the +50 line, it enters the overbought area. You should therefore be ready for trend reversal. The same case applies when the line reaches -50. But in some cases, the closest the indicator line is to the +/- 100 mark, the stronger the momentum. When the indicator line hovers around the O- level line, it means the market is ranging. You should therefore stay out.
So how do you determine whether a strong momentum will continue or the market will reverse? This is where a moving average comes in handy. This strategy involves plotting an MA on top of the CMO line. A bullish signal is confirmed when the indicator crosses above the MA line. Similarly, a bearish signal is confirmed if the indicator crosses below the indicator line.
Trading Example
The picture shows the price chart from the Great Britain pound against the Japanese yen and indicator performance for the same period. Notice how the indicator mimics the prices’ ups and downs. The price has proliferated up to areas of interest (previous support). This coincides with indicators falling into an overbought area.
In this case, the momentum has been quite high. But it is bound to reverse. Therefore, a trader should be ready to enter a short position.
Conclusion
Chande Momentum Oscillator helps traders to determine the strength of market momentum. It is akin to the relative strength index with overbought and oversold areas. When the indicator climbs above the zero line, it indicates rising upward momentum during an uptrend. When the indicator falls below the zero line it is an indication of a growing downtrend momentum. You can incorporate other momentum indicators to enhance signal accuracy.