Name, Sometimes Called:
Chande Momentum Oscillator
Often abbreviated to CMO
Brief Description:
The CMO primarily looks for extreme overbought and
oversold conditions and differs from other momentum
oscillators
by using both up and down day’s data to measure momentum directly.
The CMO can also be used to look for trends.
Definitions, Formulas:
The CMO differs from other momentum
oscillators
such as Relative Strength Index (RSI) and Stochastics.
It uses both up and down days’ data in the numerator of the
calculation to measure momentum
directly. Primarily used to look for extreme overbought and oversold
conditions, CMO can also be used to look for trends.
To calculate CMO, first select the period n. We use n
= 14 days, which is a commonly used value. Then calculate the difference
between the current period’s (i) and previous period’s
(i-1) closing prices:
d = pi – pi-1
Next, calculate the values cmo1i and cmo2i, depending on the sign
of d (d = 0 is treated as positive):
If d >= 0, then cmo1i
= d and cmo2i = 0
If d < 0, then cmo2i
= -d and cmo1i = 0
Then calculate each of two sums over the selected period:
and calculate CMO from them:
CMO = [ (sum1 – sum2) / (sum1
+ sum2) ] * 100
Positive Development Calculation:
For this TAI, a new positive development (NPD)
occurs under either of the following two conditions:
(1) when the CMO indicator crosses above 49 (that is, when CMO(14)
x+ 49)
OR
(2) when the CMO indicator crosses above the 9-day EMA
of the CMO (as a formula: CMO(14) x+ EMA(9)(CMO(14)).
This TAI is no longer positive under either of the following two
conditions:
(1) the CMO indicator is less than 50 (that is, when CMO(14) <
50)
OR
(2) when the CMO indicator crosses under the 9-day EMA
of the CMO (restated, CMO(14) x- (EMA(9)(CMO(14)).
If this TAI is still positive tomorrow it will no longer be new,
but will be a Cumulative Positive Development (CPD)
If this TAI was a new positive development (NPD)
yesterday, and is still positive today, then it becomes a cumulative
positive development (CPD).
History:
Created by Tushar Chande, this indicator is described
in the book The New Technical Trader by Tushar Chande and
Stanley Kroll (John Wiley & Sons, April 1994). Chande developed
the CMO to capture what he calls “pure momentum.”
The CMO is closely related to, yet differs from, other momentum-oriented
indicators such as the Relative Strength Index (RSI), Stochastics,
Rate-of-Change, etc. It is most closely related to Welles Wilder’s
RSI, but differs from it in several ways:
- It uses data for both up days and down days in the numerator
of the calculation, thereby directly measuring momentum.
- The calculations are applied to unsmoothed data, so short-term
extreme price movements are not hidden. Once calculated, the CMO
can be smoothed if desired.
- The scale is bounded between +100 and -100, letting you clearly
see changes in net momentum around the 0 level. The bounded scale
also allows you to conveniently compare values across different
securities.
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