The CMO computes itself just as other momentum - indicators from the closing prices. He has to other momentum - indicators a high resemblance (e.g., to the RSI after Wilder). No smoothing processes will go through in the calculation process, so that also short-term market movements are well illustrated. It is possible to smooth the CMO what would take him, nevertheless, his advantages towards of other indicators away.
Calculation of the CMO and parameters:
First the upward directed price movements are added up and also the downward directed price movements. Then both sums are subtracted of each other what proves the dividend. Then this result is divided by the sum of the first both part sums. The result of the division is still multiplied by 100 to receive the usual scale width.
Formula:
If Close (t)> Close (t-1) then (t) = Close (t) - Close (t-1)
Otherwise Up(t) = 0
If Close (t) <Close (t-1) then Down (t) = Close (t-1) - Close (t)
Otherwise Down (t) = 0
SumUp (t) = Sum (n) (Up)
SumDown (t) = Sum (n) (Down)
CMO (t) = 100 * (SumUp (t) - SumDown (t)) / (SumUp (t) + SumDown (t))
The specification of a calculation period is necessary for the calculation of the CMO. She is specified as a rule with 10, 14 or 20 days. But also in longer preferences, for example 90 days, the indicator is very valuable in the divergence analysis.
Interpretation:
There are several possibilities to use the indicator. On the one hand, two extreme values were suggested by T. CHANDE. Once the zone from 50 points which is valid as an overbought - zone. Accordingly is signed the oversold - zone with minus 50 points. If the indicator is about the mark 50, the market prices are valid as overheated. If the indicator is in the lower zone, so under the mark of minus 50, the market prices are valid as extremely low and overstretched. Here the same interpretations are also valid like with other oscillators; extreme states are seen as situations susceptible to correction in which a countermovement/reaction should start.
The next possibility which is also known from many other indicators offers the calculation of a signal line. CHANDE recommends with a period setting of the indicator of 20 days to use a signal line period of nine days. Certainly many possibilities of the variation arise with different indicator preferences and different basis values. As a purchase signal is valid an upward directed cut of the indicator above the signal line. A sales signal is the downward directed cut under the signal line. These intersections can be submitted, in addition, to a filtering by the scale position of the indicator. Here the centre line can be used as a separation between purchase signals and sales signals or also both extreme zones.
If the CMO overbought / oversold - oscillator is used, it is urgently necessary to carry out a trend regulation. Then trading signals should be used only in trend direction.
The CMO can be used as a trend strength indicator. Values about the zero line allow to expect rising market prices, the further about this line the indicator stands, the more distinctive the trend-directed movement is.
Values under the zero line allow to expect falling market prices and the lower the CMO stands, the stronger the downward directed movement is.
The next possibility is the search for divergences to the basis value. Here the same samples show to advantage, like they are also known by the RSI, the Slow - to Stochastic or the CCI. If the basis value build a new high-level point within an upward trend and the indicator stays behind his last high-level point, there is a negative (bearishe) divergence.
If the basis value build a new low-level point within a downward trend and the indicator stays above his last low-level point, so this is a positive (bullishe) divergence.
Divergences can point out us to forthcoming trend changes, on the fact that the force which stands behind the market price movements, has become too small to hold this in the running.
I would still like to mention a mighty combination of divergences and signal lines. It is known, actually, by other indicators, however, should work also with the CMO. A purchase signal by upward cross of the indicator about his signal line receives additional weight if the indicator has trained before a bullishe divergence to the basis title.
A sales signal receives accordingly additional weight if the indicator has trained before a bearishe divergence to the basis title. It is important to notice that a trend regulation should be also added to the divergence analysis. In trend-weak or trendless markets divergences have none or only very little explanatory power.
The last possibility to use the CMO is laying out of trend lines. These are dragged exactly like in stock charts also by low-level point to low-level point in the upward trend or by high-level point to high-level point in the downward trend. The interpretation is the same like from trend lines in stocks or Future - charts. The break of a downward directed trend line is valid as a purchase signal; the break of a upward directed line is valid as a sales signal.
Sources
TradeSignal: The CMO of Rene Rose
