What is Chande Momentum Oscillator?
The Chande momentum oscillator is a technical momentum indicator invented by Tushar Chande. The author introduced the indicator 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 movement over the same period.
- The chosen time frame greatly affects signals.
- Pattern recognition often generates more reliable signals than absolute oscillator levels.
- Overbought-oversold indicators are less effective in strongly-trending markets.
The Formula for Chande Momentum Oscillator is:
- sH = the sum of higher closes over N periods
- sL = absolute value of (the sum of lower closes over N periods)
How To Calculate Chande Momentum Oscillator
- Calculate the sum of higher closes over N periods.
- Calculate the sum of lower closes over N periods.
- Subtract the sum of lower closes over N periods from the sum of higher closes over N periods.
- Add the sum of lower closes over N periods to the sum of higher closes over N periods.
- Divide 4 from 3 and multiply by 100.
- Plot the result.
What Does Chande Momentum Oscillator Tell You?
This oscillator is similar to other momentum indicators such as Wilder’s Relative Strength Index (Wilder’s 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 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 Chande momentum oscillator is moving downwards. A positive divergence occurs if price is declining but the oscillator is rising.
In this 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 decide to sell short can place a stop loss order above the September swing high and take profits when the oscillator crosses below -50.
The Differences between Chande Momentum Oscillator and the Stochastic Oscillator
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.