CMO indicator : Download Free with Video Guide (MT4/MT5)
CMO indicator for MT4 is a technical analysis tool invented by Tushar Chande in 1994 in his book “The New Technical Trader”. As its name suggests this oscillator indicator belongs to the family of momentum indicators. However, cmo indicator for MT5 was designed basically to catch the momentum of a financial instrument. It is close to the Welles Wilder’s Relative Strength Index (RSI) as it measures the rise and fall in prices over a given period and oscillates between -100 and +100. In this guide, I will explain in detail this indicator
What is cmo Indicator ?
Chande momentum oscillator indicator or in short CMO is a forex indicator that is used basically to identify the momentum in the market. It displays in a separate window below the price chart. However, it represents a line that oscillates between -100 and +100. There is also a zero line which is very important. That is why it is similar to the RSI. Moreover, the CMO indicator measures the power and the speed of the price action by specifying overbought and oversold areas. But this MT5 indicator is more advantageous than the classic RSI. In fact, the chande momentum oscillator employs directly the price variation and not the average variation as the RSI does.
CMO Indicator formula
The chande momentum oscillator indicator is as follows:
CMO = [(SH – SL) / (SH + SL)] × 100
- SH: sum of the upward variations over the period between today’s close and yesterday’s close.
- SL: sum of the downward variations over the period between today’s close and yesterday’s close.
- Calculate the difference between higher close prices over N periods. (calculate the SH)
- Calculates the difference between lower closes prices over N periods. (calculate the SL)
- Substruct the sum of the downward variations over N periods from the sum of the upward variations over N periods. (SH – SL)
- Add the sum of the downward variations over N periods to the sum of the upward variations over N periods. (SH + SL)
- Divide the number obtained in the fourth step from the number obtained in the third step and multiply by 100.
How to trade with this indicator ?
The CMO indicator works in the same way as other popular momentum indicators, such as the RSI. In fact, it is easy to use but you just need to make sure that the chart trends up and down. Because the indicator does not work when the price of a security is ranging. Also, you need to choose a convenient period for trading. A shorter period is better than a longer period. The default period in most platforms is 9. Moreover, day traders generally use the CMO indicator to identify overbought and oversold signals, the direction of the trend, and divergence.
Identifying overbought and oversold signals
Identifying the overbought and the oversold presents the first procedure of using this MT5 indicator. A market that has an overbought or oversold means that the prices are rose and falt too fast and therefore should correct them. However, the overbought level is typically located above “level 50” and the oversold is typically located below “level -50”. Therefore, you can buy when the chande momentum oscillator exits its oversold zone. Whereas you can sell when the indicator exits its overbought zone.
Identifying the trend
The chande momentum oscillator indicator MT5 is an indicator that helps traders to identify the trend in the market by using the moving average crossover strategy. However, the moving average line will act as a signal line. In this case, we have to catch the crossover between the oscillator and the moving average line (MA). If the chande momentum oscillator crosses above the MA line, it indicates a bullish signal. Likewise, if the indicator crosses below the MA line, it indicates a bearish signal.
Identifying the divergence
We use the CMO indicator to identify the divergence. However, the divergence between the CMO indicator and the price shows the weakness of the trend. When prices reach new highs while the oscillator fails to cross its prior highs, then it indicates a bearish divergence. This is known as negative divergence. Besides, when the price drop while the oscillator increases, it indicates bullish divergence. And this is known as positive divergence.
Once you attach this indicator to your Metatrader chart, like in teh screen-shot bellow. It starts oscillating between 100 and -100 like the RSi indicator. Indeed, the MT4 Chande momentum oscillator indicator enables forex traders to capture the market’s momentum. It works with all kinds of timeframes and currency pairs (stocks, CFDs, shares, commodities, etc). Moreover, you can modify the default setting to fit your preferences.
The CMO indicator is an effective technical tool as it is easy to use and enables forex traders to identify overbought and oversold areas, determine the direction of the trend, and identify entry points. Therefore Chande momentum oscillator indicator helps you make better decisions.