What Is the Chande Momentum Oscillator?

The Chande momentum oscillator is a technical momentum indicator introduced by Tushar Chande in his 1994 book The New Technical Trader. The formula calculates the difference between the sum of recent gains and the sum of recent losses and then divides the result by the sum of all price movements over the same period.

Key Takeaways

  • The Chande momentum oscillator is a technical indicator that uses momentum to identify relative strength or weakness in a market.
  • The chosen time frame greatly affects signals generated by the indicator.
  • Pattern recognition often generates more reliable signals than absolute oscillator levels.
  • Overbought-oversold indicators are less effective in strongly trending markets.

The Formula for the Chande Momentum Oscillator

 Chande Momentum Oscillator = s H s L s H + s L × 1 0 0 where: s H = the sum of higher closes over N periods s L = the sum of lower closes of N periods \begin{aligned} &\text{Chande Momentum Oscillator}=\frac{sH - sL}{sH + sL}\times 100\\ &\textbf{where:}\\ &sH=\text{the sum of higher closes over N periods}\\ &sL=\text{the sum of lower closes of N periods}\\ \end{aligned} Chande Momentum Oscillator=sH+sLsHsL×100where:sH=the sum of higher closes over N periodssL=the sum of lower closes of N periods

How To Calculate the Chande Momentum Oscillator

  1. Calculate the sum of higher closes over N periods.
  2. Calculate the sum of lower closes over N periods.
  3. Subtract the sum of lower closes over N periods from the sum of higher closes over N periods.
  4. Add the sum of lower closes over N periods to the sum of higher closes over N periods.
  5. Divide 4 from 3 and multiply by 100.
  6. Plot the result.

Understanding the Chande Momentum Oscillator

The Chande oscillator is similar to other momentum indicators such as Wilder’s relative strength index (RSI) and the stochastic oscillator. It measures momentum on both up and down days and does not smooth results, triggering more frequent oversold and overbought penetrations. The indicator oscillates between +100 and -100.

Chande Momentum Oscillator Interpretation

A security is deemed to be overbought when the Chande momentum oscillator is above +50 and oversold when it is below -50. Many technical traders add a 10-period moving average to this oscillator to act as a signal line. The oscillator generates a bullish signal when it crosses above the moving average and a bearish signal when it drops below the moving average.

The oscillator can be used as a confirmation signal when it crosses above or below the 0 line. For example, if the 50-day moving average crosses above the 200-day moving average (golden cross), a buy signal is confirmed when the Chande momentum oscillator crosses above 0, predicting prices are headed higher.

Trend strength can also be measured using the Chande momentum oscillator. In this methodology, the oscillator's value denotes the strength or weakness of the expected trend. 

Example of How To Use the Chande Momentum Oscillator

Traders can use the Chande momentum oscillator to spot positive and negative price divergence between the indicator and underlying security. A negative divergence occurs if the underlying security is trending upward and the Chande momentum oscillator is moving downwards. A positive divergence occurs if the price is declining but the oscillator is rising.

Image depicting an example of price and oscillator divergence.

In the above example, Apple made a new high in late August and another new high in late September. Instead, the oscillator made a lower high in late September, confirming a bearish divergence. A trader who decides to sell short can place a stop-loss order above the September swing high and take profits when the oscillator crosses below -50.

The Chande Momentum Oscillator vs. the Stochastic Oscillator

The Chande momentum oscillator computes relative strength visually through patterns that are similar to Wilder’s RSI, with relative positioning between highs and lows determining the longer-term bullish or bearish outlook.

Stochastic calculations generate more rhythmic waves, alternating between overbought and oversold extremes. This indicator always utilizes a second “signal” line, in which crossovers higher and lower dictate buying and selling opportunities.