Chande Momentum Oscillator

Chande Momentum Oscillator
See also
Capped Index Overbought oversold indicator Evaluation criteria Capacity analysis Gamma hedging Net Volume Vomma Decline ratio Book to market ratio

Chande Momentum Oscillator(CMO) is an index named after its inventor Dr. Tushar Chande, author of The New Technical Trader and Beyond Technical Analysis (1994, Wiley), has probably done more tinkering with momentum indicators than anyone else. According to the author of the index is it a pure momentum oscillator that plots momentum on a bounded scale. It helps to spot extremes in market momentum, and it has many uses in technical analysis. "It is a variation on the RSI, yet is uniquely different."(Pring J. M. 2014, p.289) It has three characteristics:

1. The calculations are based on data that have not been smoothed. This means that extreme short-term movements are not hidden, so the indicator reaches overbought/oversold extremes more often, but not enough to result in too many signals.
2. The scale is confined within the –100 to +100 range. This means that the zero level becomes the equilibrium point. With the RSI, the 50 level is the equilibrium point, and is not always readily identifiable. With zero as the pivotal point, it is easier to see those periods when momentum is positive and those when it is negative. The zero equilibrium, therefore, makes comparisons between different securities that much easier as well.
3. The formula uses both up and down days in the calculation.

Formula

$CMO=100\cdot \left[{\frac {\left(S_{u}-S_{d}\right)}{\left(S_{u}+S_{d}\right)}}\right]$,

where:

S_u = sum of the (close-to-close) up-day momentum for n days,

S_d = sum of the (close-to-close) down-day momentum for n days.

The CMO ranges from -100 to 100 with default overbought and oversold levels of +50 and -50, representing 3:1 and 1:3 up momentum/down momentum ratios, respectively.

CMO and RSI relationship

The CMO differs from The Relative Strength Index (RSI) in that:

• it has no internal smoothing calculation, making short-lived momentum extremes more apparent(probably the most important difference)
• it includes both up and down momentum in the numerator (the RSI has only up momentum in its numerator). In effect, the CMO is related to the RSI by the following formula:

$CMO=2\cdot (unsmoothedRSI)-100$ "Unlike for the RSI, the calculations for the CMO are based on unsmoothed data—meaning major short-term movements are visible and not concealed. "(Thomann A. 2019, p. 9) "The CMO does exaggerate some of the more minor price fluctuations and registers more extreme zone penetrations than RSI, the usefulness of which will depend on the user's need for a more responsive indicator.(Chande and Kroll suggest smoothing the oscillator after calculation if the trader desires.)"(Etzkorn M. 1997, p. 78)

References

• Chande, T. S. and S. Kroll (1994), The New Technical Trader: Boost Your Profitby Plugging into the Latest Indicators, John Wiley & Sons, p. 95
• Etzkorn M. (1997), Trading with Oscillators: Pinpointing Market Extremes -- Theory and Practice, John Wiley & Sons, Canada, pp. 77-78
• Pring J. M. (2014), Technical Analysis Explained, Fifth Edition: The Successful Investor's Guide to Spotting Investment Trends and Turning Points, McGraw Hill Professional, p. 289
• Rockefeller B. (2014), Technical Analysis For Dummies, John Wiley & Sons, Hoboken, p. 235
• Thomann, A. (2019), Appendix to'Is Trading Indicator Performance Robust? Evidence from Semi-Parametric Scenario Building'. Evidence from Semi-Parametric Scenario Building, p. 9

Author: Katarzyna Kraj