The Chande Momentum Oscillator was introduced by Tushar Chane in 1994. The oscillator measures the momentum of a given security, thus making it similar to related oscillators such as the relative strength index (RSI) or the moving-average-convergence-divergence (MACD).
The Chande Momentum indicator is used for spotting overbought and oversold levels as it oscillates above and below its zero line.
Overbought and Oversold Levels for the Chande Oscillator
Like other oscillators for measuring overbought and oversold levels, the Chande Momentum oscillator also has these levels built-in.
You can use the following readings for spotting oversold and overbought levels:
- When the indicator is 50+, the security is overbought.
- When the indicator is -50, the security is oversold.
How to use the Chande Oscillator
There are two ways of using the Chande Oscillator for making trading decisions. The first is to use it to spot overbought and oversold levels, and the second is to spot divergences between price and momentum.
Overbought and oversold levels are easily identified as the oscillator moves above and below its zero line, while divergences are identified when prices move out of sync with momentum. For example, a bearish divergence will occur when prices move upwards while the Chande Oscillator moves downwards. On the other hand, a bullish divergence will occur when prices move down and the Chande Oscillators moves upwards.
Combining the Chande Oscillator with other indicators
As always, it’s recommended to combine indicators with others for the full picture of a security’s health and momentum. You can combine this indicator with other momentum-based indicators such as the MACD, RSI, as well as look for confirming signals from simple moving averages and other lagging indicators.
For example, you could confirm a classic bull flag formation on the price chart with an increase in momentum on the Chande Oscillator, or double check that a new trend is in force from the MACD or balance of power (BOP).