Chaikin Money Flow indicator Is a volume-weighted average of accumulation and distribution over a specified period. In addition, this indicator is used to measure the buying and selling pressure present in a security over a set period. Just like indicators in general, the display of CMF is presented using a moving line and will show a number with a range of 1 to -1 which will indicate the distribution phase with 0 as the centerline which will indicate the distribution phase.
The indicator generated oscillates below or above the 0 lines. Above 0 is considered a bullish trend while below 0 indicates a bearish trend but it is not advisable to use this indicator alone to determine the trend rather it is more useful to measure the strength of the market.
To calculate the CMF indicator value, We need to use three different formulas to fetch the Chaikin money flow value.
The money flow multiplier (MFM) = [ (close – low) – (high - close) ] / (high - low)
MFV = MFM x Trade Volume
CMF = Total MFV /Total Volume
For example lets take these values for calculation.
Close = $8
high = $11
Low = $7
Period volume = $25
Total period volume = $1000
MFM = [(8-7)-(11-8)] / (11-7)
= -2/4
= -0.5
MFV = -0.5*25
= -12.5
CMF = -12.5/1000 = -0.0125
Hence therefore my CMF value is -0.0125
I will be demonstrating using the TradingView Exchange. We begin by logging into the TradingView platform.
Click on the index symbol on the chart which I mentioned in the above image. This will show the entire indicators on the exchange.
Here we are in need of CMF hence I searched and found the Chaikin money flow indicator.
To change the setting you can click on the indicator set through the setting symbol on the chart as I mentioned above.
You can also change the line color and its size at our convenience.
The CMF Indicator can confirm trends as there is a good correlation between price movement and the flow of money in and out of an asset. If money flows into an asset, this indicates buying pressure, increasing demand leading to an uptrend in price action.
If CMF is moving above zero towards the positive side on increasing volume and price, it confirms the direction of the trend in a bullish direction, and buy entry can be spotted. In terms of money flow, it can be understood as the flow of cash is increased.
On the other hand, if CMF moves below the zero line on increasing volume. It indicates a strong bearish trend and sell opportunities can be spotted.it means that the cash is flowing out.
Here you can see I demonstrated the chart with STEEM/USDT pair. Here the CMF line moves below the 0 lines hence we are facing the market change along with it.
The Chaikin Money Flow indicator is a measure of closing prices against the price range. When the price closed at the upper half of the price range for the same period, we say there's buying pressure, and buying pressure implies that accumulation is ongoing for the asset. when the price closed at the lower half of the price range for the same period, we say there's selling pressure, and selling pressure implies that distribution is ongoing for the asset.
Divergence is an occurrence where the price movement forms a higher high but the oscillator indicator forms a lower high in the same period or when the price movement forms a lower low but the oscillator indicator forms a higher low in the same period.
In the bullish divergence, the Chaikin Money Flow Indicator shows the Bullish movement, while in the charts the price movement goes downwards. So that shows that the downtrend is about to end, so after that, the price goes in the Bullish trend as you can see in the above image.
The above image is the trading pair of BTC/USDT you can see here the CMF indicator moving in the up direction and the actual price chart is in the down direction resulted in the bullish divergence finally we can see the bullish trend.
In the bearish divergence, the Chaikin Money Flow Indicator shows the bearish movement, while in the charts the price movement goes upwards. So that shows that the uptrend is about to end, so after that, the price goes in the bearish trend as you can see in the above image.
The above image is the trading pair of BTC/USDT you can see here the CMF indicator moving in the down direction and the actual price chart is in the up direction resulting in the bearish divergence finally we can see the bearish trend.
Does False Signal Given By The CMF Divergence Strategy
As we all know we all are not 100% genuine likewise not all the indicators work 100%. But it will show the maximum possibility. I am saying here maximum of the signal given by the CMF divergence may work. In order to confirm that we have to use two or more indicators to verify it. To increase the quality of investment opportunities while also filtering out misleading and false signals, the best method is to combine the Chaikin Money Flow indicator with other technical indicators.
Here is some of my recent blogs :-