(C.M.F.) is a indicator used to measure over a set period of time. is a metric used to measure the buying and selling pressure of a security for single period. C.M.F. then sums over a user determined look-back period. Any look-back period can be used. However, the most popular settings would be 20 or 21 closes. In the Chaikin Money Flow's value fluctuates between 1 and -1. C.M.F. can be used as a way to further quantify changes in buying and selling pressure and can help to anticipate future changes and therefore, trading opportunities.
Chaikin's Money Flow's value fluctuates between 1 and -1. The basic interpretation is:
- When C.M.F. is closer to 1, buying pressure is higher.
- When C.M.F. is closer to -1, selling pressure is higher.
Buying and Selling Pressure can be a good way to confirm an ongoing trend. This can give the trader an added level of confidence that the current trend is likely to continue. However, just becaue buy/sell pressure is in favor of the current trend it does not mean that levels shown can sustain the direction if it is advancing or declining into the opposite direction.
- During a , continuous Buying Pressure ( values above 0) can indicate that prices will continue to rise.
- During a , continuous Selling Pressure ( values below 0) can indicate that prices will continue to fall.
The C.M.F. is designed for use with the (OBV) and in addition to other indicators.
In this example, I will focus on a Bearish scenario since most traders tend to be able to spot scenarios easily.
- As can be seen on the 6 hour chart above, the divergences are typically pretty clear. At the C.M.F. peak shown by the vertical red line, we had a nice rally prior. At the C.M.F. peak we dropped for 18 hours and then started a new rally. At this point, the C.M.F. began to show less buy pressure that did not coincide with the new price high since its prior peak. In this case, I would monitor smaller time frames (for quicker reaction data) to see if the picks up. It did not; creating a drop to match the actual buy pressure decline.
- Move forward to the price action shown by the vertical blue line. We attempted another rally with less than convincing buy pressure on the C.M.F.. Price action created what some traders call a that could not be sustainable due to the declining buy pressure on the C.M.F..
For my settings here I have left the stock inputs at 20 and changed the view to area with breaks.
The (C.M.F.) is great for identifying hidden price movements. As with all indicators you should use it in conjunction with similar indicators ( based in this example) and also confirm on multiple time frames. The C.M.F. has been a great tool that I have used over the years to identify early price prediction and movement.
I will focus on indicators best used in conjunction with the C.M.F. in my next few educational ideas.
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