CMO Oscillator Trading Strategy

Overview

This strategy uses the Chande Momentum Oscillator (CMO) to determine overbought and oversold levels for trading signals. The absolute CMO values over 3 periods are averaged to smooth the oscillator for identifying extremes. A typical mean reversion oscillator trading strategy.

Strategy Logic

The key logic includes:

1. Calculating absolute CMO values over 3 different periods
2. Taking the average of 3-period absolute CMO values
3. Going short when average value exceeds upper threshold
4. Going long when average value drops below lower threshold
5. Closing positions when CMO returns to normal range

The CMO reflects the momentum of price changes. High absolute values represent price divergence entering overbought/oversold zones. The strategy utilizes this characteristic of CMO, using a multi-period average to smooth the curve for identifying extremes.

Advantages

• Uses CMO to identify overbought/oversold regions
• Multi-period averaging smooths curve and avoids false signals
• Sound theoretical basis for overbought/oversold detection
• Customizable parameter thresholds to adapt
• Simple mean reversion implementation

Risks and Mitigations

• Potential for false CMO signals
• Requires ongoing threshold optimization
• Sustained extremes during trends can cause losses

Mitigations:

1. Adding trend filter to avoid counter-trend trades
2. Parameter optimization for better CMO sensitivity
3. Using stops to limit losses

Enhancement Opportunities

The strategy can be enhanced through:

1. Volume confirmation to avoid false breakouts
2. Incorporating trailing stops for better risk management
3. Auto-optimization of parameters via machine learning
4. Volatility-based position sizing
5. Combining with other strategies to diversify and improve returns

Conclusion

This strategy uses CMO to identify overbought/oversold for mean reversion trading. Multi-period averaging helps avoid false signals. CMO itself has sound theoretical basis for gauging divergence. Enhancements through better parameters, stops, and filters can make it a stable oscillator trading strategy.