# Chande Momentum Oscillator

Author: Consultant Finmaxfx

Strong trends are rare in the financial markets and sometimes it would take too much time for a trader to wait for sharp one-way price action. In most cases, assets remain in tight sideways ranges, bouncing up and down several times during the trading session. Such a price action allows traders getting profits from both sides of the market, doubling potential bargain. That’s especially related to cross-rates such as EUR/GBP or AUD/CAD, for example. The nature of those waves comes from cyclical trading as speculators and real money accounts buy one currency during their trading hours, and then other country steps in, selling the same currency.

In order to gain on two-sided price action, the trading system must be equipped with a well-designed combination of technical indicators showing oversold and overbought levels on intraday charts.

## What is Chande Momentum Oscillator?

Tushar Chande, a technical analyst, developed his own oscillator to point out the market’s momentum. Although it’s similar to popular indicators like Relative Strength Index and Stochastic oscillator, and it’s also range bounded (from -100 to +100), Chande Momentum Oscillator (CMO) gives reliable trading signals, showing the strength of bulls or bears in current market conditions. The mathematical formula takes into account the sum of all recent gains and losses and divides it by total value of all price action for the given period. We prefer using CMO with a default period of 9 bars, while traders might test the strategy with different periods.

### The Formula for Chande Momentum Oscillator is:

Chande Momentum Oscillator = (sH−sL) : (sH+sL) * 100

where: sH = the sum of higher closes over N periods sL = the sum of lower closes of N periods

## How to use Chande Momentum Oscillator

The secondary tool of the Chande Momentum Oscillator trading system is standard Relative Strength Index oscillator indicating oversold and overbought levels, as well as the market’s momentum. The key target of RSI is to whether to confirm or deny signals coming from Momentum oscillator, while additional features of RSI help to find reversal divergences on the chart. The period should be modified. We recommend using 13-bars period for fast and frequent entries and exits (scalping strategy with tight stop-loss and take-profit orders), while swing traders who like to buy and hold an asset should enlarge the period to 21 bars. The trading system works well for any asset on timeframes larger than 15 minutes. However, we’d remind traders to check the market conditions before using the system as it works best in ranges with no strong trend in play.

When it comes to entering conditions, they are quite simple. The main requirement before opening longs is to check out both oscillators’ peaks. Chande Momentum oscillator must be below the level of -50, having more room to go north, while RSI must be above the value of 30, which is the threshold for oversold conditions. Short trades should be considered when CMO is above +50, while RSI is below 70. Therefore, we find the top and bottom of the current price, and additional instrument like horizontal static resistance/support line might help to filter market noise and avoid false signals.

If you like this strategy, you might also be interested in this Aroon Indicator

Exit conditions and time in the market depends on the chosen asset and timeframe. As we show an example of the system in action on EUR/GBP chart (see the screenshot below), which is one of the most liquid cross-rates in the FX market, recommendations to take profits are as follows: 15-20 pips for 15-minutes chart, 20-25 pips for 30-minutes, 30 pips for 1-hour and so on. Stop-loss orders should be calculated according to risk management rules, and profit/risk ratio should not be lower than 2:1.