CHANDE MOMENTUM OSCILLATOR WITH DIVERGENCE SIGNALS

  • July 10, 2019

​Let's take a look at the Chande Momentum Oscillator and the ways that we can use it with divergence signals. It can be used to take some great trades. 

Or we can use it to avoid entering into a trade. ​The Divergence Series Blogs have focused on tools that can be used by intraday and swing traders.

This blog entry is focused on a tool that is really useful to swing traders. If you haven't read the other Divergence Blogs, you can find the RSI, the MACD​, and the ​On Balance Volume

CHANDE MOMENTUM OSCILLATOR

The Chande Momentum Oscillator (CMO) was developed by Tushar Chande to calculate price momentum on up days (like the RSI Oscillator). But also to calculate momentum on down days as well. The formula is interesting: 

1.)  If today's close is higher than yesterdays close, then subtract yesterdays close from today's close. CMOa

2.)  If today's close is lower than yesterdays close, then subtract today's close from yesterdays close. CMOb

3.)  Sum up all the values for the timeframe (I like 13 as the Look back Period)

4.)  CMO= 100 x (CMOa – CMOb) / (CMOa + CMOb)

​FORMULA OF THE CHANDE MOMENTUM OSCILLATOR

The Chande formula calculates the difference between the sum of all recent gains by the sum of all recent losses. Then divides that by the sum of all price movements in the look back period. 

The results are multiplied by 100 to get the -100 and 100 boundaries. It'd be extremely unusual to see the Chande Momentum Oscillator reach the -100 or 100 levels.

The equilibrium point for CMO is the Zero Line. Check out our service for more ways to trade using indicators. 

Chande Momendum Oscillator

Typical Chande User Dialog Box

​CHANDE MOMENTUM OSCILLATOR LEVELS

In the picture above, the typical Chande Momentum Oscillator user dialog box shows a look back length of 20. It shows the Chande Momentum Oscillator (CMO), Zero Line, Upper Level, and Lower Level.

The Upper level is50 and the Lower Level is -50; this is typically considered the over bought and oversold levels. ​

CLOSER LOOK

Let's take a closer look at the Chande Momentem Oscillator. The CMO Study uses the concept of upper level and lower level to signal extreme momentum to the up side or extreme momentum to the downside. 

Evaluating the strength of a move gives us the ability to avoid entering trades that have no velocity behind the move. This Momentum study is measuring the strength of the move.

However, there is no signal for taking a trade other than the zero line. If we leave the CMO with only this zero-line crossover as our trade signal, we'd miss out on some great trades.

To fix this, most traders add a rolling average to the CMO and use that for trade signals. The typical Simple Moving Average that traders use is set to 10; which provides us with crossover signals for our trade entries.

When the CMO crosses above its 10-period average we can use that as a buy signal and when the CMO crosses below its 10-period average we can use that as our sell signal.

Why? A CMO that is above the10 period SMA is an indication that momentum is above average; this means that not only is there momentum, there is ‘above average' momentum.

Chande Momentem Oscillator

CMO Cross-Up

CHANDE MOMENTUM OSCILLATOR CROSSOVER

In the picture, you can see that a signal was generated when the chande moment oscillator crossed above the 10SMA. 

You also see a warning signal was generated when the CMO crossed the 50 line. These signals offered an opportunity to participate in the move and gave assurance of remaining in the trade until a warning signal was given.

PERSPECTIVE ON CHANDE MOMENTUM OSCILLATOR

The Chande Momentum Oscillator was developed to be used on a high time frame. I've found it very useful on daily and weekly charts.

It helps me determine my swing trade entries and exits by using a CMO setting of 13 with a rolling average of 10. While a trader could possibly use this on an intraday chart to monitor momentum, I personally believe there are better indicators to use intraday and that daily, weekly and monthly charts are the more accurate timeframes for this study.

DIVERGENCE WITH CHANDE MOMENTUM OSCILLATOR

This is the Divergence Series AND the reason I've focused on divergence in trading is because divergence gives traders an early indication of change. I've developed divergence signals into various studies to help us spot the divergence more easily. 

Typically, divergence is found by drawing trend lines on the CMO from peek to peek, or from valley to valley looking for a divergence between price action and CMO signals.

​Check out our stock market courses to learn different trading strategies. In fact, check out our penny stocks list or stock watch lists to see if you can use the Chande Momentum Oscillator with those stocks.

​If you're looking for something different however, check out our real time stock alerts. These are trades with entries and exits given.

BULLISH DIVERGENCE

When price forms a lower high while the Chande Momentum Oscillator forms a higher high this is Bullish Divergence. Typically, we would draw trend lines from price peek to price peek. 

And from CMO peek to CMO peek and look for a divergence but with the divergence signal added into the CMO indicator. You'll see the Bullish Divergence even if it's only a slight divergence without having to measure each peek.

The Bullish Divergence signal is a green dot on the Zero Line. When price forms a higher high while the CMO forms a lower high this is Bearish Divergence. The Bearish Divergence signal is a red dot on the Zero Line.

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Chande Momentum Oscillator

Bullish Divergence

BEARISH DIVERGENCE

After a strong rally, the Chande Momentum Oscillator indicator gave a Bearish Divergence signal, indicating that the continued price action in the upward trend was not to be trusted. 

The CMO had already crossed below the SMA, indicating that momentum was below average. The Divergence Signals indicated that the attempts to cross back above the SMA were a fake out.

Chande Momentum Oscillator

Bearish Divergence

FIBONACCI MEASUREMENT

While measuring the CMO with my drawing tools, I noticed that Fibonacci lines made this easier. As a result, I've added Fibonacci Lines to this study. 

I've also made it easy to turn these lines off since they do offer a bit of clutter into the study. Personally, I like to turn the Fibonacci lines on to see a measurement after a divergence signal is given. Then turn the Fibonacci lines back off when I'm done.

Try our day trading room free for 14 days.

Fibonacci Measurement

Divergence Study User Dialog Box

DIVERGENCE STUDY USER DIALOG BOX

In the above picture is the user dialog box for the CMO Divergence Study. Don’t let all these boxes intimidate you! 

I've added a user hint for the CMO and the SMA to offer typical settings. And I've also added a one click ability to turn on / turn off the fib lines by choosing yes or no in the “Plot Fib Lines Box.”

This study also has built in crossover alerts, which can be turned off by choosing ‘no’, which is find is better than opening the lower alerts settings and clicking each alert (check out our different types of stocks page).

Divergence Study

Alerts and Labels Color Change

CMO DIVERGENCE LABELS AND ALERTS

In the above picture you see that there's an Alert Message that'll trigger when the CMO crosses above / below the SMA. You also see the section called Globals. 

This is the section for changing the label colors. Labels? Yes! I've added labels that'll pop up when crossovers happen. Why?

Well, there's more than one way to use this study. If you already have too many lower indicators and don't have room to add a new study to the lower area of your charts, you can add this study to the chart section instead.

I've added the ability to mark crossovers with a line that runs through the chart when a crossover happens. You can see that in the picture below.

CMO Divergence

Alerts and Labels Color Change

TREND FOLLOWING

​The Chande Momentum Oscillator works well with Keltner Channels identify strong-trending stocks. I use trend changes on the Chande Momentum Oscillator to generate signals and breakouts above/below the Keltner Channel to confirm. ​The rules are simple:

  • Go long when Chande Momentum Oscillator completes a higher trough and price breaks above the Keltner Channel;
  • Go short when Chande Momentum Oscillator completes a lower peak and price breaks below the Keltner Channel;
  • Exit long positions if the close is below the Keltner Channel; and
  • Exit short positions if the close is above the Keltner Channel.
  • Troughs or peaks are completed when Chande Momentum reverses across the zero line.

PUTTING IT ALL TOGETHER

So, how does it all come together? In the picture below, you can see the Keltner Study presented as a gray cloud. The CMO study offering lines go through the candles when the CMO crosses above / below the SMA in the upper chart area. 

While the lower CMO study gives the trader a visual of the CMO if they want it. With the ability to place this study in either section of the chart, I feel that there's more diversity.

Wrapping Up

Alerts and Labels Color Change

REVIEW

The Chande Momentum Oscillator is a great tool for swing traders to measure the momentum of a move to determine if a trade should betaken or avoided. 

With divergence signals added, we now can spot potential fake outs, reversals, or lack of true momentum in the price action. Use the SMA to identify when price action has above average momentum and to give entry or exit signals. 

Make sure you get comfortable using this study before attempting to place any trades. And understand that price action, support and resistance, and price structure are always the best tools to assist with developing a trading plan.

Chande Divergence Study: http://tos.mx/z9lyq7 

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