To use the Chande Momentum Oscillator (CMO) indicator, follow these steps:
- Study the formula: The CMO is calculated by taking the difference between the sum of positive price changes and the sum of negative price changes over a specified period. The result is then divided by the sum of all price changes.
- Choose the period: Determine the time period over which you want to calculate the CMO. Commonly used time periods range from 14 to 20.
- Calculate the CMO: Calculate the CMO value using the chosen period. This can be done manually by tracking price changes, or you can use a charting software that includes the CMO indicator.
- Interpret the results: The CMO ranges from -100 to +100. Values above 50 indicate positive momentum, while values below -50 indicate negative momentum. Values between -50 and +50 suggest a lack of significant momentum.
- Identify trends and reversals: Use the CMO to identify potential trends and reversals. When the CMO crosses the zero line from below, it could suggest a bullish reversal. Conversely, when the CMO crosses the zero line from above, it could indicate a bearish reversal.
- Use overbought/oversold levels: Some traders use overbought and oversold levels of the CMO as a trigger for potential trade opportunities. For example, levels above +50 might be considered overbought, signaling a potential sell opportunity, while levels below -50 could be seen as oversold, indicating a potential buy opportunity.
- Combine with other indicators: The CMO can be used in combination with other technical indicators or chart patterns to confirm or supplement trading signals. For example, you might look for bullish confirmation when the CMO crosses above the zero line alongside a bullish moving average crossover.
Remember to test and validate the effectiveness of the CMO indicator on historical data before relying on it for real-time trading decisions.