Marc Chaikin developed Chaikin Money Flow or CMF. It measures the volume-weighted average of accumulation and distribution over a certain period. When the Chaikin money flow indicator is red, it suggests the market is in a downtrend and when it is green, the indicator suggests an uptrend. Money flow index uses volume in combination with recent price movements to determine trends and to determine whether a market is overbought or oversold.
What is the Chaikin Money Flow?
The main idea behind the CMF is that the closer the closing price is to the high, the more accumulation occurs. On the other hand, the closer the closing price is to the low, the more distribution occurs. If the price action consistently closes above the candlestick or bar’s midpoint, the CMF is positive. Whereas, if the price closes below the midpoint, the CMF is negative.
The formula for the Chaikin Money Flow is as follows:
CMF = n-day Sum of [(((C – L) – (H – C)) / (H – L)) x Vol] / n-day Sum of Vol
n = number of periods, typically 21
H = high
L = low
C = close
Vol = volume
The Chaikin Money Flow oscillator calculation, which is an accumulation/distribution indicator, is done by subtracting a 10-day exponential moving average (EMA) of accumulation/distribution line from a 3-day EMA of the accumulation/distribution line. This measures price fluctuations around the accumulation/distribution line.
To simplify the working of CMF, here is an example.
Suppose a man named John is at an auction. When the auction takes place, there are buyers or accumulators on one side, and on the other side, there are sellers or distributors. When the sellers are more in number than buyers, the price of the product decreases. Conversely, when the buyers are more in number, the price of the product increases.
Chaikin money flow indicator measures the amount of money flow volume (the amount the asset is being traded) over a specific period, as well as in which direction it is moving (negative or positive). Chaikin oscillator measures the momentum behind the accumulation distribution of the asset.
How to use the Chaikin Money Flow?
To utilize the CMF, the Chaikin oscillator is used. It signifies the momentum during price fluctuations in accumulation/distribution. Traders could also choose to apply the MACD indicator, along with the Chaikin oscillator.
For example, if a trader wants to find out whether EUR/USD is more likely to go up or fall, and the MACD is trending higher. The Chaikin oscillator will generate a bullish divergence.
Generally, the Chaikin oscillator creates a bullish divergence when it crosses above a baseline. The baseline is the accumulation-distribution line. A cross above that line indicates that traders are buying more.
The CMF oscillator produces two buy and sell signals. First, a positive divergence occurs when the central line crosses above the accumulation/distribution line. This gives a buy signal. In comparison, a negative divergence appears when the central line crosses below the accumulation/distribution line. It then gives a sell signal.
A positive divergence is a signal of upward momentum, while the negative divergence is a signal of downward momentum.
Chaikin Money Flow Index trading strategy
The Chaikin oscillator generates a bullish divergence when it crosses above a baseline. The baseline is called the accumulation-distribution line. A cross above that line indicates that traders are accumulating, which is typically bullish. The Chaikin oscillator utilizes two primary buy and sell signals.
The standard CMF period is 21 days. The principle behind the Chaikin Money Flow is the nearer the closing price is to the high, the more accumulation has taken place. Conversely, the nearer the closing price is to the low, the more distribution has taken place. If the price action consistently closes above the bar’s midpoint on increasing volume, the Chaikin Money Flow will be positive. Conversely, if the price action consistently closes below the bar’s midpoint on increasing volume, the Chaikin Money Flow will be a negative value.
The CMF oscillator can be used on any chart timeframe, from the hourly to daily and the weekly charts. Thus, day-trader and long-term traders can utilise the Chaikin Money Flow indicator.
Chaikin Money Flow Index buy strategy
- Apply the CMF oscillator on the chart.
- The central line must cross above the accumulation/distribution line.
- Wait for the price bar to go bullish before entering.
- Enter the trade when the indicator is moving upwards.
- Place a stop-loss near the recent low from the entry point.
- Exit the trade on high.
Chaikin Money Flow Index sell strategy
- Apply the CMF oscillator on the chart.
- The central line must cross below the accumulation/distribution line.
- Wait for the price bar to go bearish before entering.
- Enter the trade when the indicator is moving downwards.
- Place a stop-loss near the recent high from the entry point.
- Exit the trade on low.
Chaikin Money Flow Index conclusion
The Chaikin Money Flow Indicator is a volume indicator created by Marc Chaikin (as well as the Chaikin oscillator). The indicator measures the amount of money that flows over time. The indicator is the foundation for the accumulation and distribution indicator.
The Chaikin Money Flow belongs to a family of momentum oscillators, and can work better when combined with its other family members like the MACD. The Chaikin Money Flow Indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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