Knowledge of current economic events is a fundamental element of effective trading. In the case of currency pairs and indices, the ability to use the calendar is already satisfactory. Nevertheless, to assess market sentiment, it is worth following current events. In the case of instruments such as shares, tracking information from companies is a necessity.
Chaikin Money Flow (CMF) Indicator
Type of Indicator
The Chaikin Money Flow (CMF) is a technical analysis indicator that combines price and volume data to determine the flow of money into and out of an asset. It is a volume-based indicator that helps investors understand market strength by assessing whether accumulation (buying) or distribution (selling) is the dominant process.
Purpose
The primary purpose of the CMF is to measure money flow over a specified period and identify potential turning points in the asset's price. CMF can be used to:
Confirm the direction of a trend,
Identify overbought and oversold conditions,
Detect divergences between the indicator and the price.
Calculation Method
Calculating the Chaikin Money Flow involves several steps:
Calculate the Money Flow Multiplier (MFM):
where:
CC is the closing price,
LL is the low price,
HH is the high price.
Calculate the Money Flow Volume (MFV):
Sum the Money Flow Volume over the selected period:
CMF is typically calculated for a 21-day period.
Trading Based on the Chaikin Money Flow Indicator
Trend Confirmation:
When CMF is positive, it indicates a dominance of accumulation, suggesting that prices might continue to rise. This is a potential buy signal.
When CMF is negative, it indicates a…
