How to Use The Chaikin Money Flow Indicator
The Chaikin Money Flow indicator provides future market direction by analysing the strength of the market trend and underlying buying or selling pressures. It also helps in identifying if the market is overbought or oversold. In our article, we will discuss the Chaikin Money Flow indicator in detail.
What is the Chaikin Money Flow indicator?
Chaikin Money Flow is a momentum indicator that measures the volume of a currency pair over a specific period of time to determine the accumulation (buying level) and distribution (selling level) of the currency pair. This helps in interpreting various marketing signals like entry levels, exit points, and ideal stop-loss levels. It oscillates between +1 and -1 and has a centreline at 0. The Chaikin Money Flow indicator provides several market signals, like the strength of the existing trend, buying and selling pressures, and more.
- When the indicator gives values between 0.5 and 1, it indicates a continued uptrend and signals traders to place long orders.
- When the indicator gives values between -1 and -0.5, it indicates a continued downtrend and signals traders to place short orders.
It is rare for the indicator to give values exactly equal to +1 and -1. If it does, -1 represents an oversold market and signals traders to place long orders with an uptrend reversal expectation, and +1 indicates an overbought market and signals traders to place short orders with a downtrend reversal expectation.
How does the Chaikin Money Flow indicator work?
It signals traders to place buy orders whenever the currency pair price levels approach the overbought level but still make higher highs, and the indicator diverges to lower high price levels and starts falling. On the other hand, it signals traders to place sell orders whenever the currency pair price levels approach the oversold level but still make lower lows, and the indicator diverges to higher lows and starts increasing.
How to calculate the Chaikin Money Flow indicator?
1. Calculate the multiplier
Calculate the Chaikin multiplier for each period, which identifies where the currency pair prices are going to close. It helps in understanding if the market is trending in an upward direction or downward direction. Money flow multiplier = ((Close value – Low value) – (High value – Close value)) / (Close value – Low value) (High value – Low value)
2. Calculate the volume
Next, calculate the volume of money flow in the forex market. You can calculate multiple volumes that the currency pair is being traded with during a specific time period with the following formula: Money Flow Volume = Money Flow Multiplier * Volume of the currency pair during that period
3. Calculate the Chaikin Money Flow (CMF) value
Divide the money flow of each time period (daily, hourly or weekly) over the considered time frame by the sum of all volumes computed over this period. The default time frame to consider with CMF is 21 days, but you can increase or decrease this as per your trading requirements. Hence, CMF = 21-day average of money flow every day / 21-day average of volume for 21-days
Benefits of Chaikin Money Flow indicator
- It spots emerging trends in the forex market by rising above or falling below the centreline.
- It helps in confirming trending market signals when used with other indicators.
- It confirms the strength of the trend direction by moving in the bullish territory (strong uptrend) or bearish territory (strong downtrend).
- It provides potential exit price levels through a divergence in the currency pair price levels and indicator ’s movement. This helps in identifying reversal signals.
Top trading strategies for Chaikin Money Flow indicator
Divergence trading strategy
The Chaikin Money Flow indicator identifies divergences in the market and helps traders place orders opposite to the current momentum. A divergence with the CMF indicator occurs when the currency pair prices and CMF oscillate in opposite directions. This strategy acts as a reversal indicator and signals traders to enter existing downtrends and exit existing uptrends.
- When the currency pair is in an uptrend, but CMF is not, it indicates a continued uptrend and signals traders to place long orders.
- When the currency pair is in a downtrend, but CMF is not, it indicates a continued downtrend and signals traders to place short orders.
Zero-line crossover strategy
The zero line crossover strategy indicates buying and selling signals whenever the CMF indicator crosses the zero line from above or below.
- It indicates a continued uptrend when the CMF indicator crosses the zero line from above and generates long/buy signals.
- It indicates a continued downtrend when the CMF indicator crosses the zero line from below and generates short/sell signals.
In this strategy, combining the CMF indicator with another technical indicator is advised to confirm the trend. One of the best strategies to use with CMF is moving averages, which helps determine existing trends.
- Whenever the currency pair prices are trading above the moving average, it signals traders to place long orders due to an expected uptrend continuation.
- When the currency pair prices are trading below the moving average, it signals trades to place short orders due to an expected downtrend continuation.
Trade with the Chaikin Money Flow indicator today
Chaikin Money Flow indicator can identify several market signals like breakouts, reversals, overbought and oversold zones, along with determining buying and selling pressures. Start trading with Blueberry Markets, a forex trading platform in Australia and use this indicator along with other technical indicators to receive confirmed market signals at once. Sign up for a live trading account or try a risk-free demo account.
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