Summary
- If the price goes up fast and more traders are buying than selling, this can be classified as “overbought“. If Bitcoin is crashing and more traders are selling, this can be classified as “oversold“.
- The Chande Momentum Oscillator (CMO) indicator has values ranging between -100 on the lower end and +100 on the upper end.
- Overbought is when the value is 50+ and oversold is when the value is -50. Bitcoin usually oscillates between these two extremes.
- The indicator is similar to the RSI indicator, but the RSI indicator is based on the speed of price action while the CMO indicator is based on closing prices.
- The CMO timeframe can be changed to produce different results for different timeframes (i.e. 10 days, 10 weeks, etc).
- The indicator was introduced in 1994 and was developed by the same person who developed the Stochastic RSI indicator – one of the most-used RSI indicators.
- The indicator can be used in conjunction with other indicators such as moving average, Fibbonaci levels, Relative Strength Index, and others.
- The indicator is available for all Phemex users on the spot trading and futures markets.
What is The Chande Momentum Oscillator?
The Chande Momentum Oscillator (CMO) is a trend indicator that measures if the price of Bitcoin (BTC) is overbought or oversold. The CMO indicator has a range of -100 up to +100, the former signaling a downtrend and the latter signaling an uptrend. The indicator can be used on the 1W, 1D, 6H, and short-term charts.
The CMO indicator can be used alongside other indicators such as moving average (MA). This helps traders confirm their bias when the line starts oscillating below or above the 0 line. If the indicator goes above 0, it presents a long opportunity and if it goes below 0, it presents a short opportunity.
This indicator is similar to the Relative Strength Index (RSI) indicator in that it measures when the asset is overbought or oversold. This indicator was developed by the same person who invented the Stochastic RSI (StochRSI) indicator. However, it does not use smoothening (additional time values) which makes it oscillate more than the RSI and Stochastic indicators.
Chande Momentum Oscillator History
The Chande Momentum Oscillator is named after its inventor, Mr. Tushar Chande. Chande is a Canadian-based mathematician and trader with over 30 years in the industry. He introduced the CMO indicator in his 1994 book “The New Technical Trader – Boost Your Profits by Plugging into The Latest Indicators”.
Mr. Change is also the inventor of popular trading indicators such as Aroon, StochRSI, and VIDYA. He also made variations of the momentum indicator such as the Chande Dynamic Momentum Indicator.
The difference in the Chande Dynamic Momentum versus Chande Momentum Oscillator is that the dynamic oscillator uses multiple time frames while the CDO indicator uses one time frame (i.e. 10 weeks). These indicators were designed to be used across all markets including stock, forex, commodities, and recently crypto.
Chande Momentum Oscillator Formula
The Chande Momentum Oscillator is based on this formula:
This formula was developed for the stock markets with open and closing times. This means the calculations reset every trading day.
The sH part of the formula calculates the highest closing prices over a certain period, and the sL calculates the lowest closing prices over that same period. These closing prices are subtracted and added with custom n values that signal time such as 1 week, 7 weeks, 14 weeks, etc.
How To Calculate Chande Momentum Oscillator?
To calculate Chande Momentum Oscillator results, one can use the formula. The formula divides these values and multiplies them by 100. This ultimately gives it a range that can go above or below zero by 100, with the lowest point being -100 and the highest point being +100.
The Chande Momentum Oscillator formula can be used in the crypto markets too. The difference is that crypto trading goes on 24/7 and the openings and closes for crypto start at 00:00 UTC on most exchanges, whereas on the stock markets they open at 9AM and close at 5PM. If Bitcoin is trading at $40,000 at 00:00 UTC, the indicator would use that as the closing price.
How to Use the Chande Momentum Oscillator
Let’s use Phemex platform for this demonstration. The Chande Momentum Oscillator is available for 50+ spot market cryptos and futures markets. Choose a trading pair to get started. For example, the BTC/USDT chart:
The Bitcoin chart on Phemex without any indicators.
Press on “Indicators” at the top and search for “Chande Momentum Oscillator”:
Search for the CMO indicator among hundreds of indicators available for all trade pairs.
Left-click on the name and the indicator will automatically load below the Bitcoin price chart:
The CMO indicator is active on the bottom of the chart.
The indicator is marked as “ChandleMO 9” under the candles. The “9” stands for 9 days, being that in this case we’re using the daily chart (D). If we press on “W” (weekly), we’ll get a different result:
The CMO indicator values can change based on the timeframe selected.
The weekly chart indicates that Bitcoin is trading below 0 on the CMO indicator, which means it’s bearish (overbought). This corresponds to the price action at the time of writing because Bitcoin is trading at -44% from its all-time high at $69,000.
Overbought territory starts at +50 and oversold territory starts at -50. The current average of 0 means it’s neither overbought nor oversold – it’s trading sideways.
When Bitcoin was trading at $69,000 back in November 2021, the CMO oscillator showed a value of +80 which was near the peak of overbought territory. This presented shorting opportunities for traders who timed the market using this indicator.
Chande Momentum Oscillator Strategy
The CMO indicator can be used to trade by market buying and selling using spot orders or placing futures trades. The most commonly used strategy is to do the reverse of the market when it goes into extreme overbought or oversold territory.
The following are CMO values on the Bitcoin weekly chart:
The CMO indicator values on the Bitcoin weekly chart.
If the oscillator is reaching extreme overbought levels such as 50+, a trade could short the market. This was proven true when Bitcoin made two all-time highs above $60,000 in the last year and crashed afterwards in May and November of 2021. In both cases, the value was near 80.
Conversely, when the market crashed in May, the CMO value reached -80, which is extreme oversold territory. A trader could use that opportunity to long Bitcoin until it reaches overbought territory and close their trade.
An effective strategy when the price goes sideways and the value is 0 is to wait for it to start climbing above 0 and open a long trade. Historically, when the value on the CMO indicator climbed from below 0, Bitcoin was on the upswing for a few months afterwards.
Chande Momentum Oscillator vs RSI
The Relative Strength Index (RSI) is the most similar indicator to the CMO indicator – they both provide overbought and oversold values. The RSI indicator is a lot older and was invented in 1978. It is also used a lot more than the CMO indicator.
The main difference is that the RSI indicator is based on the speed of price movements while the CMO indicator is based on the closing price for each day. Despite the difference in calculation, both of them provide similar values.
The RSI indicator can be used alongside the CMO indicator. Open “Indicators” again and search for “Relative Strength Index”. Left-click on the indicator and the two will load side-by-side on the chart:
The RSI indicator working side-by-side with the CMO indicator.
We can see that the two closely mimic the trend line and have almost identical values on the weekly chart. The main difference is that the CMO indicator is a bit more volatile while the RSI indicator seems more flat lined in comparison. According to this chart, Bitcoin is slowly breaking out of oversold territory and might move to the upside soon.
Compared to the RSI indicator, the CMO indicator can give unique divergence values for the price of Bitcoin. For instance, when the price of Bitcoin is going up but the value of the CMO indicator is not going up, this is a sign there’s going to be a bearish divergence and the price could crash shortly after.
If we analyze the values for the Bitcoin price a month after the May 2021 crash, we can see that Bitcoin’s price was going up but the CMO indicator line was not following the trend. This suggested that we could expect a bearish divergence and the price crashed afterwards.
Conclusion
The Chande Momentum Oscillator indicator gives us confirmation signals as to how the market is behaving based on closing prices. If there is a buying frenzy and traders are FOMOing in, the CMO indicator will trend above +50 and it has done exactly that whenever Bitcoin rose to a new all-time high. Conversely, if traders are panic-selling their Bitcoin, the indicator goes below -50% into oversold territory.
The strength of the trend is confirmed by extreme values on the CMO chart. The indicator can also give us additional data about divergences that the indicators such as RSI might miss and/or send false signals. It is one of the best supplemental indicators for tracking the state of the market.
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