Monday, June 23, 2014

Chaikin Money Flow (CMF)

Chaikin Money Flow (CMF) is another indicator developed by Marc Chaikin, a stockbroker since 1966.

The idea behind CMF indicator lies in combining price and volume in order to view the flow of the money (in or out of the market) during a chosen period. Default CMF period - 21 day.

Hence, the CMF Formula which shows the sum of the values of the 21 period

Accumulation/Distribution Line divided by the 21 period sum of volume:

sum(((( C-L )-( H-C )) / ( H-L ))*V ) / sum(V)

C- close
L - low
H - high
V - volume (21 period)

How to interpret CMF indicator

Understanding of the Chaikin Money Flow indicator is based on the theory that overall market strength is often accompanied by the price closing in the upper half of its daily high/low range on increased volume. While market weakness is often accompanied by the price closing in the lower half of its daily range on increased volume as well.

Therefore, if price consistently closes in the upper half of its daily range with increased volume, then the CMF indicator will be reading above zero - positive CMF, which suggests that the market is strong.

And vise verse: if the price consistently closes in the lower half of its daily range with increased volume, then the CMF indicator will be reading below zero - negative CMF, which indicates that the market is weak.

(Note, the zones has been colored for the illustration purposes only. We don't have such colored indicator so far; CMF_T3 version is able to show indicator as histogram, which can be switched in the settings).

How to trade with Chaikin Money Flow

1. CMF above zero - bullish signal - the indicator shows signs of buying pressure - accumulation.
CMF below zero - bearish signal - the indicator shows signs of selling pressure - distribution.

So, you'll be looking to Buy when CMF is above zero, and Sell when it's below.

2. Observation of the previous indicator readings before your trading day starts can give an idea of how long and sustainable the buying/selling pressure was. For example, extended periods of selling pressure (distribution) indicate that sentiment is more likely remain negative for the trading day.

3. Another way to examine the indicator is to look at the intensity of the Chaikin Money Flow readings. Higher readings indicate stronger pressure. For example, CMF readings above 0.10 would be significant enough to guarantee a bullish signal. While readings above 0.25 would be an indication of a really strong buying pressure.

4. CMF indicator offers good confirmation signals of breakouts for various support/resistance levels, in particular, trend lines. For example, if price has recently broken an uptrend line, to confirm it CMF will cross below its zero line after some time, showing that the market is ready to Sell.
Note, that CMF is a lagging indicator, thus it would take time to confirm a signal, which would suite conservative traders, but may not impress more aggressive traders.

5. A divergence between price and Chaikin Money Flow indicator can give early signals about underlying weakness of the move. A situation in which the price reaches new highs and the CMF Oscillator does not reach its new high creates a bearish divergence when the selling pressure begins to grow. This warns traders about a possible reversal ahead. It's similar to MACD divergence.

Download: CMF_v1.mq4

1 comment :

  1. Quantum Binary Signals

    Get professional trading signals sent to your mobile phone every day.

    Follow our trades right now and make up to 270% a day.


PAMM Monitoring

Economic Calender