How to trade with Chaikin Money Flow
1. If the CMF is above zero, this is a bullish signal as the indicator is showing signs of buying pressure.
If the CMF is below zero, this is a bearish signal as the indicator is showing signs of selling pressure.
2. The indicator can also be used by a trader when looking back at the previous day’s readings. If there are long periods of sustained strength or weakness there is a higher likely hood that the next day will also follow along the same trend.
3. Another use of the indicator is looking at the strength of the indicators readings to gauge how significant a signal it is. Readings above 0.1 would indicate a fairly strong signal and the closer to 0.25 and above the stronger.
4. The CMF indicator can also be used to signal breakouts, for various support/resistance levels, in particular, trend lines. E.g. if the price has recently broken an uptrend line you can use the CMF to confirm it if it crosses below its zero line after some time, showing that the market is ready to Sell. Bear in mind the CMF is a lagging indicator which means the is a delay in confirmation.
5. The last use for this indicator is when you see a divergence between price and indicator, it can give you an early signal about underlying weakness of the move. If the price reaches a new high and the CMF Oscillator does not reach a new high, it creates a bearish divergence when the selling pressure starts to increase. This is a reversal warning.
How to interpret CMF indicator
The indicator is based on the theory that the strength of the market can be determined by looking at where the price closes compared to its daily range and volume. If the market is strong you will see if closing in the upper half with a high volume. A weak market can be seen if it closes in the lower half of the range on high volume.
It the price consistently closes in the upper half of the daily range on high volume the indicator would read above zero and indicates a strong market.
It the price consistently closes in the lower half of the daily range on high volume the indicator would read below zero and indicates a weak market.
Chaikin Money Flow (CMF) is an indicator developed by Marc Chaikin who was a stockbroker from 1966.
The idea behind the CMF indicator combines price and volume in order to view the flow of the money in and out of the market for a chosen period. The default period is 21 days.
Equation - ((( C-L )-( H-C )) / ( H-L ))*V ) / sum(V)
C - close
L - low
H - high
V - volume (21 period)