True Momentum Oscillator: The Ultimate Guide to the TMO Indicator

Momentum oscillators like the True Momentum Oscillator Indicator (TMO) are powerful technical analysis tools used by traders to identify trend reversals and gauge the strength of price movements. This comprehensive 2000 word guide will explain what the TMO is, how it works, and how to effectively use it in your trading.

Key Takeaways:

• The TMO measures price momentum using only closing price data
• It oscillates above/below zero to gauge bullish/bearish momentum
• Overbought and oversold levels identify potential reversals
• Crossovers generate trading signals aligned with the trend
• Divergences warn of momentum shifts ahead of price
• Combine TMO with other analysis for optimal accuracy

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What is the True Momentum Oscillator indicator and How Does it Work?

The TMO, also known as the Chande Momentum Oscillator, is a technical indicator that measures the momentum behind price changes in a security. It calculates momentum using the delta between the current closing price and a previous closing price from a user-defined number of periods ago.

The TMO aims to identify trend reversals and divergence earlier than traditional momentum oscillators using only price data. It oscillates above and below zero, with readings above zero indicating an uptrend and readings below zero indicating a downtrend.

The indicator displays overbought levels above 50 and oversold levels below -50. Crossovers of the TMO line and signal line can generate trading signals. The indicator also identifies bullish and bearish divergences when price and momentum move in opposite directions.

How is the True Momentum Oscillator Calculated?

The TMO calculation uses two user inputs – the calculation length and smoothing length. The typical defaults are 14 for the calculation length and 5 for the smoothing length.

Here are the steps to calculate TMO:

1. Calculate the delta between the current closing price and the closing price 14 periods ago.
2. Smooth this delta using a 5 period exponential moving average.
3. Calculate the 6 period simple moving average of the smoothed delta to signal line.
4. Subtract the signal line from the smoothed delta to get the TMO value.
5. Plot the TMO above/below a zero line. Readings above 0 indicate upside momentum, and readings below zero indicate downside momentum.

The key difference between TMO and other oscillators is it only uses price data in its calculation rather than a blend of price and volume. This aims to better capture the momentum behind current price action.

How to Use the True Momentum Oscillator for Trading Signals

The TMO can generate trading signals in several ways:

• Overbought/Oversold – Readings above 50 indicate overbought conditions and potential trend reversal lower. Readings below -50 indicate oversold conditions and potential trend reversal higher.
• Crossovers – Bullish signal when TMO crosses above signal line. Bearish signal when TMO crosses below signal line.
• Divergence – Bullish when price makes new low but TMO makes higher low. Bearish when price makes new high but TMO makes lower high.
• Trend Identification – TMO above zero indicates uptrend. TMO below zero indicates downtrend.

When using TMO, it is best to combine signals with other indicators or price action analysis to confirm signals and increase accuracy. Divergences, crossovers and overbought/oversold levels are most useful when they align with the current trend.

Advantages and Disadvantages of the True Momentum Indicator

Advantages:

• Sensitive to changes in price momentum and trend strength
• Earlier identification of reversals and divergence than other oscillators
• Oscillates clearly around a zero line
• Simple and intuitive trading signals

Disadvantages:

• Can generate false signals if used alone without confirmation
• Lagging when used in choppy or range-bound markets
• Only uses price, ignoring volume data

Overall, the TMO is a very useful indicator for assessing momentum and confirming trend direction when integrated into a complete trading strategy. Combining TMO with price action analysis, other indicators, and proper risk management will optimize performance.

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Using the TMO Indicator on Thinkorswim

The TMO indicator comes standard on the Thinkorswim trading platform. Follow these steps to add it to your chart:

1. Open a chart for your desired security.
2. Click on “Studies” in the chart settings.
3. Type “TMO” in the search box.
4. Select “True Momentum Oscillator” and click “Add Selected”.
5. Adjust the inputs as desired – such as calculation and smoothing length.
6. Click “Apply” and the TMO indicator will display on your chart.
7. Analyze crossovers, divergences and overbought/oversold readings per the strategies outlined above.

Thinkorswim allows extensive customization of the TMO so traders can optimize it for their strategy. The default inputs serve as a good starting point for most traders.

Conclusion: A Powerful Tool for Momentum Traders

The True Momentum Oscillator is a valuable tool for technically oriented traders who focus on momentum, trend strength, and identifying reversals. Its sensitivity and early signals provide an edge for timing entries and exits.

However, the TMO should not be used as a stand-alone indicator. Combining its signals with other analysis like price action, additional indicators, and proper risk management is key to improving performance. With the right application, the TMO can provide high-probability trading opportunities in range-bound and trending markets alike.