Chaikin money flow(CMF): How to analyze the direction of financial market using chaikin money flow indicator

By QuintoTrader | Quinto Trader | 15 Oct 2019


Chaikin money flow is an oscillator indicator.

Being an oscillator indicator, Chaikin money flow was created by Mark chaikin with the main objective of helping traders to know whether the market is in overbought or oversold condition by measuring money flow volume over a given period of time.Just like in other oscillator indicators, chaikin money flow also has an oscillation at point 0 ranging from -0.5 to 0.5. Chaikin money flow indicator is based on centerline, overbought and oversold as well as divergence.

 

According to Mark Chaikin, the values of Chaikin money flow indicator is gotten as follows;

 

-calculating the money flow multiplier as follows;


money flow multiplier= {(close price-low price)-(high price-close price)}/(high price-low price)

-calculating the money flow volume as follows;

 

money flow volume= money flow multiplier* volume of a given period

-From the two results,the chaikin money flow is therefore calculated as follows;


21 period CMF= 21 period sum of money flow volume/21 period sum of volume

Therefore, using the concept of overbought and oversold as well as divergence, chaikin money flow can further be explained as follows;

Concept of overbought and oversold

Since chaikin money flow is based on centerline,it therefore follows that when the chaikin money flow crosses above 0 that will be an indication of a bullish market thus the trader should be trading upwards while when the chaikin money flow crosses below 0 that will be an indication of a bearish market thus the trader should be trading downwards.

Based on overbought and oversold,it therefore follows that when chaikin money flow crosses above 0.2 when it is in a bullish condition,that will be an indication of an overbought market condition thus the trader should close any buy position and enter a sell position since the market will start moving downwards.On the other hand,when the chaikin money flow crosses below -0.2 when it is in a bearish condition,that will be an indication of an oversold market condition thus the trader should close any sell position and open a buy position since the market will start moving upwards.This is indicated as from the candle sticks chart below;

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From the candlesticks chart above,there are 3 points,A,B and C.Point A represents an oversold market condition while point B represents an overbought market condition.Point C represents the chaikin money flow .At point A,the chaikin money flow has crossed below -0.2 thus an indication of an oversold market condition at that point.This will signal the trader to close any sell position at that point and open a buy position since the market is starting to move upwards.On the other hand,at point B ,the chaikin money flow has crossed above 0.2 thus an indication of an overbought market condition at that point .This will signal the trader to close any buy position and enter a sell position since the market is starting to move downwards.

 

Concept of divergence

Using the concept of divergence, when the market is moving upwards while the chaikin money flow is trending downwards, the market will reverse and start moving in the same direction downwards as the chaikin money flow. On the other hand, when the market is moving downwards while the chaikin money flow is trending upwards, the market will reverse and start moving in the same direction upwards as the chaikin money flow. This is indicated as from the candlesticks chart below;

 

351665157-2a47f1f20a04ee10c002b470c762c9a9800c0cdb21f85e9704e688840010e1a7.png

 

From the candlesticks chart above, there are two points, point A and B. Point A represents upward CMF movement while point B represents downwards CMF movement. At point A , the market was moving downwards while the chaikin money flow was moving upwards. The market then reverse and starts moving in the same direction upwards as the chaikin money flow thus signaling the trader to be trading in an upward market direction at point A. On the other hand, at point B, the market was moving upwards while the chaikin money flow was moving downwards. The market then reverse and starts moving downwards in the same direction as the chaikin money flow thus signaling the trader to be trading in a downwards market direction at point B.

Recommendation:If you are a day trader just use 1 min,5 min,15 min and 30 min timeframe while if you are a swing trader just use 1 hour and above timeframe if you want chaikin money flow to work well for you

 

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QuintoTrader
QuintoTrader

Trader, Blockchain Technologist and Contentpreneur. Also founder and CEO @ Quinto Trader


Quinto Trader
Quinto Trader

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