What it means
Momentum indicators try to answer a simple question: how strongly is the price moving, and in which direction? The CMO was created by Tushar Chande and differs from many similar tools because it uses both the up days and the down days in the numerator, so it captures the full range from strong falls to strong rises.
For each day in the chosen window, typically 14 days, the indicator looks at the change in closing price. Gains are added together to give the sum of up moves, losses are added together to give the sum of down moves, and the oscillator is the difference divided by the total movement.
A reading near +100 means that nearly all the movement in the window was upward, and a reading near -100 means that nearly all of it was downward. A reading near zero means ups and downs are balanced and the price is going nowhere.
Traders often treat readings above +50 as overbought, a sign that a rise may be stretched, and readings below -50 as oversold, a sign that a fall may be overdone. Others use a zero-line crossing as a trend signal.
The nuance is that overbought does not mean the price must fall. In a strong trend, the indicator can stay above +50 for a long time, so it works best with trend analysis, support and resistance levels, and sound risk limits.
The calculation window is the main setting a user controls. A short window such as 9 days makes the line jumpy and quick to signal, while a longer one such as 20 days makes it smoother and slower.
Many traders test several settings on past data before choosing one, taking care not to simply pick whatever looked best in hindsight.
In practice
Real-world examples.
Example
A swing trader sees the CMO on a retail share rise to +65 after strong earnings. She treats this as confirmation of a strong trend, but she tightens her stop-loss level because the reading is also in overbought territory.
Example
A portfolio manager watches a commodity price whose CMO sits near zero for several weeks. He concludes that the market lacks direction and delays adding to the position until the indicator moves clearly above +20.
Example
An analyst at a pension fund looks at a currency pair that has a CMO of -70 after a sharp sell-off. She reads it as oversold, but waits for the indicator to turn upward before recommending any purchase.
Formula
Calculation
CMO = 100 x (sum of up moves - sum of down moves) / (sum of up moves + sum of down moves)
Over the last 14 days, a share price rose on several days for a total gain of $30, and fell on other days for a total loss of $10.
CMO = 100 x (30 - 10) / (30 + 10) = 100 x 20 / 40 = 50. A reading of 50 shows that upward movement clearly dominated the period. If the figures were reversed, with $10 of gains and $30 of losses, the CMO = 100 x (10 - 30) / (10 + 30) = -50.Case study
Seen in the real world.
Fernhill Asset Partners is an illustrative, fictional boutique fund that tests simple indicators before using them. Its analyst compared the CMO with a popular momentum indicator over a historical period for ten mid-sized shares.
She found that the CMO reacted faster to sudden price moves, which helped it flag the start of trends earlier, but it also produced more false signals during sideways periods. To manage that, the team required the CMO to agree with a 50-day moving average before acting on any signal.
The combined rule reduced the number of trades by about a third and avoided several poor entries. The illustrative lesson is that indicators are most useful when their weaknesses are known and covered by a second check.
Watch out
Common mistakes.
- Selling automatically whenever the reading goes above +50, when strong trends can stay in overbought territory for long periods.
- Comparing readings that use different window lengths, as a 9-day CMO will swing much more than a 20-day CMO.
- Treating the indicator as a forecast, when it only summarises what has already happened to the price.
Questions
People also ask.
How does the CMO differ from the RSI?
The Relative Strength Index smooths the data and ranges from 0 to 100, whereas the CMO uses raw sums and ranges from -100 to +100.
What period should I use?
Fourteen days is a common default, and shorter periods react faster but produce more false signals.
Does it work for any market?
It can be applied to shares, currencies, commodities and indices, but its usefulness varies with how trending the market is.
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