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Trading Strategies With The Amazing Chande Momentum Oscillator

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Introduction

The Chande Momentum Oscillator is a technical indicator developed by the Australian trader Tushar Chande, and he introduced it in his book ‘New Technical Trader’ in 1994. This indicator is similar to the other indicators such as the RSI, and Stochastic Oscillator except it uses both the up days and the down days in the denominator and numerator to measure the momentum of the given currency. It oscillates between the +100 and -100. The CMO indicator does not use the internal smoothing, and as a result, it reaches the overbought and oversold areas more regularly than the other momentum indicators which use the internal smoothing, such as Stochastic and RSI.

Calculation

CMO=100x(Up-Down)/(Up+Down)

Up is the sum of positive changes over a specified period (bar period)
Down is the sum of negative changes over a specified period (bar period)

Installing ‘Chande Momentum Oscillator’ in MT4 (step – by – step process)

By default, the CMO indicator is not available in the MT4 Terminal, but it is available on the internet. Follow the link below to download the same.

https://www.best-metatrader-indicators.com/chandes-momentum-oscillator/

Download the zip file from the link given above and extract the files. Then paste it to your MT4 directory/MQL4.

Make sure to paste the file in the ‘Indicators’ folder.

Then restart your MT4 Terminal.

Once you rester, click on Insert > Indicator > Custom > Chande Momentum Oscillator.

We have applied the indicator on the USDJPY chart as you can see in the image below.

Chande Momentum Oscillator trading strategies

CMO + Moving Averages Strategy

As we know by now, the CMO is a momentum oscillator. It oscillates between the +100 and -100 levels. When this Oscillator reaches the +50 area, it means that the underlying currency is overbought. Likewise, if the indicator reaches the -50 area, the underlying currency is considered oversold, and a price reversal is expected. This Oscillator also gives us the bullish & bearish momentum signals. When CMO crosses the zero line, it is a bullish momentum signal, and it is a bearish momentum signal when it crosses below the zero-line.

Moving Averages is a popular and handy indicator in the market. Most of the professionals, hedge funds, banks use this indicator to predict the future move in the market. In this strategy, we are using the simple moving average with the default setting of the 5 and 15 periods to generate trading signals in the market.

So the strategy here is to combine CMO and SMA. When the 5-period moving average crosses the 15-period moving averages, and the SMO moves below the zero-line, it is a ‘sell’ signal for us. Not to forget, Moving Averages works the best in a strong trending market. So always use this strategy where the market is trending and not moving sideways. Make sure to book the profit when the CMO indicator reaches the -50 area. Because when that happens, the indicator is telling us that the currency is oversold in the market and a price reversal is expected. No strategy is 100 per cent perfect, so always use Stop Loss order. We suggest you use the recent high if you are in the ‘sell’ side and use the recent low if you are on the ‘buy’ side.

Sell Example

In the below AUDCHF 15 minute chart, the overall market is in a downtrend, and the 5-period moving averages crosses the 15-period moving average line. At the same time, the CMO indicator moves below the zero-line and thereby gives us the ‘sell’ signal. As you can see, when the CMO indicator reaches the -50 level, there is a sharp reversal. So follow the rules of the strategy very well and close your trades when the indicator reaches the -50 level.

Buy Example

For the buy side, the strategy is to wait for the CMO to cross above the zero-line and see if the 15-period moving average is crossing the 5-period moving average from below. If yes, it is a definite ‘buy’ signal.

In the below CADCHF 15 minute chart, the market is in an uptrend. When the 15-period MA crosses the 5-period MA from below, half the criteria is fulfilled. And when the CMO also goes above the zero-line, it is a clear ‘buy’ signal for us.

CMO + RSI Indicator

Just like MA, the Relative Strength Index is also one of the most famous indicators. The market is said to be in overbought conditions if the RSI is above 70 and oversold conditions if the RSI is below 30. In this strategy, we combine the RSI and CMO oversold and overbought area to generate genuine trading signals.

Sell Example

The strategy is extremely simple. When both RSI & CMO indicators reach the overbought area and give a sharp reversal, it can be considered a potential ‘sell’ signal.

As you can see in the below chart, both the RSI and CMO reached the overbought area. It means a potential market reversal is expected.

We are not going to blindly hit the ‘sell’ when the prices reach the overbought area. We need the reversal sign from both of the indicators to confirm the reversal. The reason behind this is that, sometimes, the indicators reach the overbought area, and just holds there for no reason. This sometimes gives the false signal. So it is better to wait for the reversal before hitting the sell. However, if only one indicator reaches the oversold area, we suggest you book only half of the profit and wait for another indicator to reach the oversold area to close your full trade. In this way, your profits can be maximized.

Buy Example

For the buy trade, wait for both the indicators to reach the oversold area and display a sharp reversal, it is to buy an entry for us. Remember when the RSI reaches the 30-area and gives us the sharp then only the reversal is valid and when the CMO indicator at -50 or below, and it gives us the reversal that reversal is valid to trade in the market.

As you can see in the image below, both the indicators hit the oversold area, and they give us a sharp reversal. Hence it is a potential buy signal for us. Make sure always to use the Stop Loss order to protect your account from sudden fluctuations.

Conclusion

The CMO oscillates between the +100 and -100 level. When the indicator goes above the zero-line, it means the momentum is bullish, and when it moves below the zero-line, it means the momentum is bearish. The default setting of the indicator in MT4 is nine-period. If you are new to the CMO, we suggest you use this indicator with the default setting. You can change the setting according to your trading style once you gain some experience. Taking your trading decisions solely based on one indicator is never recommended. So always pair it with some other indicators to generate more accurate trading signals.

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