Chande Momentum Oscillator and Trading
Trading with the chande momentum oscillator is a challenging task. Since the indicator will oscillate between +100 and -100, a break of +50 could mean that it is overbought, but remember the indicator has another 50 points it can run. Many traders apply a moving average to the indicator and will use crosses of the CMO and a simple moving average to generate trade triggers. Another approach is to trade a security when the chande momentum oscillator has reached extreme readings. Extreme readings are an indication that a strong trend is in place, and traders will add to their positions on any minor corrections.
Chande Momentum Oscillator Overbought & Oversold Levels
The CMO is surely a unique oscillator, but it also has overbought and oversold levels. Since the indicator is based on previous closing prices, it will oscillate between +100 and -100. Traders use a general rule that when the chande momentum oscillator is greater than +50 the security is said to be overbought, while a reading below -50 is considered oversold. Traders should not simply buy or sell a security because the indicator crosses these thresh holds, since this is a sure way to lose money.
Chande Momentum Oscillator Formula
Su is the sum of the difference between today’s close and yesterday’s close. Sd represents the absolute value of the difference between today’s close and yesterday’s close on down days.
