DEFINITION of 'Chande Momentum Oscillator '

The Chande momentum oscillator is a technical momentum indicator invented by Tushar Chande. Chande introduced the indicator in his 1994 book “The New Technical Trader. “It is created by calculating the difference between the sum of all recent gains and the sum of all recent losses and then dividing the result by the sum of all price movement over the period.

The Chande momentum oscillator formula is:

CMO = 100 x ((Su – Sd) / (Su + Sd))

Image depicting an example of the Chande momentum oscillator

BREAKING DOWN 'Chande Momentum Oscillator '

This oscillator is similar to other momentum indicators such as the Relative Strength Index and the Stochastic Oscillator except that is measures momentum on both up and down days. The oscillator also does not use smoothing which makes it reach oversold and overbought levels more frequently. 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 moves below the moving average. 

The oscillator can be used as a confirmation signal when it crosses above or below 0. For example, if a trader notices that the 50-day moving average has crossed above the 200-day moving average (golden cross), he or she could confirm the buy if the Chande momentum oscillator has crossed above 0; this would suggest prices were showing upward momentum.

Trend strength can also be measured using the Chande momentum oscillator. The higher the oscillator's value, the stronger the trend; the lower the value, the weaker the trend. (To learn more, see: How do I Build a Trading Strategy with the Chande Momentum Oscillator?)

Chande Momentum Oscillator and Price Divergence

Traders can use the Chande momentum oscillator to spot positive and negative price divergence between the indicator and the 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 price is declining, but the oscillator is rising. In the example below, Apple Inc. made a new high in late August and another new high in late September. The oscillator, however, made a lower high in late September, confirming negative divergence. Traders who decided to take a short position in the stock could place a stop-loss order above the September swing high and cover when the oscillator crosses below -50. (For further reading: What Does it Mean to Use Technical Divergence?)

Image depicting an example of price and oscillator divergence.

RELATED TERMS
  1. Klinger Oscillator

    The Klinger Oscillator was developed to determine the long-term ...
  2. Chaikin Oscillator

    Chaikin Oscillator is a technical analysis tool used to measure ...
  3. Dynamic Momentum Index

    The dynamic momentum index is used in technical analysis to determine ...
  4. Commodity Channel Index - CCI

    The Commodity Channel Index​ (CCI) is a momentum-based technical ...
  5. OsMA

    OsMA is used in technical analysis to represent the variance ...
  6. McClellan Summation Index

    The McClellan Summation Index is a long-term version of the McClellan ...
Related Articles
  1. Trading

    Best technical indicators to pair with the stochastic oscillator

    Learn how the stochastic oscillator indicator is sensitive to price, and discover technical indicators traders use to complement it such as the RSI and MACD.
  2. Trading

    Percentage Price Oscillator – An 'Elegant Indicator'

    The percentage price oscillator, which measures momentum, is among the more sophisticated tools in the technical analysis arsenal.
  3. Trading

    An Introduction to Oscillators

    Find out how this indicator may help improve the average investor's entry and exit points.
  4. Trading

    MACD And Stochastic: A Double-Cross Strategy

    The stochastic oscillator and the moving average convergence divergence (MACD) are two indicators that work well together.
  5. Trading

    How to Use the Chaikin Oscillator

    What's the best way to reconcile increasing or decreasing volume with price fluctuations? Enter the Chaikin Oscillator.
  6. Investing

    The top technical indicators for commodity investing

    Learn how traders can use "the usual suspects" standard for trend trading when it comes to choosing indicators for commodities investing.
  7. Trading

    Combining Trend and Countertrend Indicators

    In the long run, one of the best approaches might be to meld these two disparate methods.
RELATED FAQS
  1. How do I read and interpret an Stochastic Oscillator?

    Understand the basics of the stochastic oscillator and how analysts and traders use this measure of trend momentum to predicts ... Read Answer >>
  2. What is the difference between Stochastic Oscillator and Stochastic Momentum Index?

    Discover how the stochastic oscillator and the Stochastic Momentum Index differ and why the latter is considered a more refined ... Read Answer >>
  3. What's the difference between relative strength index (RSI) and stochastic oscillator?

    Learn about some of the main differences between the relative strength index and the stochastic oscillator, two well-known ... Read Answer >>
  4. What are the main differences between Williams %R oscillator & The Relative Strength ...

    Learn about the Williams %R indicator and how this momentum oscillator differs from the relative strength index (RSI) both ... Read Answer >>
  5. Is a Slow Stochastic Effective in Day Trading?

    The good news is that most technical indicators can be adjusted to be of value to a day trader. Read Answer >>
  6. What are the best technical indicators to complement Fibonacci Retracements?

    See what kind of technical indicators and oscillators work best in conjunction with Fibonacci retracements to confirm stock ... Read Answer >>
Trading Center