Hello to all. The number of people who want to trade in
financial markets is increasing. In this huge market, it has become possible to
trade with different currencies, stocks, commodities, cryptocurrencies, and
other assets from all around the world. Do you know what the best part of this
business is? - You don't have to wake up early in the morning and go to work.
In other words, you become the boss of your own business. Another advantage
that financial markets offer us is the ability to trade with a small amount of
capital. Succeeding in such a global market depends on being able to perform
the right technical and fundamental analysis. Technical analysis is the most
widely known method that we must learn when we start trading for the first
time. Technical indicators are an important part of technical analysis. In
today's article, we will discuss the Chaikin Money Flow (CMF) indicator.
What is the Chaikin Money Flow (CMF)?
The Chaikin Money Flow (CMF) indicator, developed by Marc
Chaikin in the 1980s, is a technical indicator used to measure the money flow
volume derived from price movement and volume. We can also describe Chaikin
Money Flow (CMF) as an oscillator-based technical analysis indicator used to
measure buying and selling pressure on a security. In other words, this
indicator determines the presence of money flowing into or out of a security by
examining volume data. The CMF indicator signals that when closing prices are
in an uptrend, prices are expected to continue rising, indicating accumulation.
Conversely, when in a downtrend, it supports prices continuing to fall,
suggesting distribution. The 0 (zero) line in the indicator is of critical
importance and provides information about the direction or magnitude of
buying/selling pressure. A value above zero indicates buying pressure or
positive money flow, while a value below zero indicates selling pressure,
meaning negative money flow.
Calculation of Chaikin Money Flow (CMF)
The money flow volume is calculated by looking at how much
the closing price has changed compared to the previous trading day. The CMF
indicator takes a value between 0 and 1. When the indicator is above zero, it
indicates that prices are trending upwards, and buyers are dominant. When the
indicator is below zero, it indicates that prices are trending downwards, and
sellers are dominant. The indicator is calculated using price movement and
volume data, and the following formula is used to calculate the CMF indicator:
CMF = (20-day average money flow volume) / (20-day average
volume)
Here:
- CMF: Chaikin Money Flow indicator
- 20-day average money flow volume: The average money flow volume over a 20-day period
- 20-day average volume: The average volume over a 20-day period
The CMF oscillator can range from -1 to +1. A value of 0
indicates that buying and selling pressure is equal. Positive values between 0
and +1 indicate that buying pressure is stronger than selling pressure.
Negative values between 0 and -1, on the other hand, reflect that selling
pressure is stronger than buying pressure.
Trading with Chaikin Money Flow (CMF) Indicator
CMF can be used as an early indicator of a trend change. If
a security's price is rising and CMF is also rising, it's likely that the trend
will continue. Conversely, if a security's price is falling and CMF is
decreasing, it's probable that the trend will reverse. One of the most common
classical methods of trading with CMF is as follows: if the CMF oscillator line
(the blue line in the example chart) crosses above the 0 line from below, we
enter a Buy order. Contrarily, if the oscillator line (blue line) crosses below
the 0 line from above, we enter a Sell order. Take a look at the example on the
4-hour chart of Euro/Chinese Yuan for reference:
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| CMF indicator usage in a 4-hour chart of EUR/CNY |
The method mentioned above is a classic approach and still
valid. However, some traders have started using it in a different way. In this
variation, they enter a Buy order when the oscillator line (the blue line) is
turning from the very bottom (negative value) towards the 0 line. Conversely,
they enter a Sell order when the oscillator line (blue line) is turning from
the top (positive value) towards the downside. This way, they capture signals
earlier in the trend reversal process.
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| CMF divergence trading on GBP/AUD |
In the CMF indicator, we can also trade based on divergences
between the price chart and the oscillator. In the GBP/AUD example chart above,
you can see that a Sell order is triggered with Negative Divergence, and a Buy
order is triggered with Exaggerated Divergence. Here, only two examples are
provided, but you can trade with all types of divergences in the CMF indicator.
Information about the types of divergences and how to use them in trading is
provided in this article: "Different Types of Divergences."
Remember. Trading in financial markets carries the risk of losses. The Chaikin Money Flow (CMF) indicator should not be used as the sole tool for forex trading. Like any indicator, the CMF indicator can sometimes produce false signals. It should be used in conjunction with other technical analysis indicators that suit your trading strategy, consider fundamental analysis, and take risk factors into account. Wishing you profitable trades!