As I mentioned in my previous post on the generalities of the Chaikin Money Flow indicator, the technical functionality of this prodigious tool serves to reveal that if the stock closes near the high of the session with higher volume, the Chaikin Money Flow indicator will increase in value, while if the price action closes near the low of the session with higher volume, the Chaikin Money Flow indicator will decrease in value.
One of the most useful elements of the Chaikin Money Flow indicator is that in addition to projecting the strength or weakness of the price action of a financial instrument, it also serves as a guide to possible trend reversals or breaks.
One of the fundamental signals provided by the CMF technical indicator is that if the indicator is above zero (0) it is interpreted as a bullish signal, while a reading below zero (0) is interpreted as a bearish signal.
The Chaikin Money Flow indicator produces false signals, so it should be used in conjunction with other indicators in order to reduce the risk of losses in our trading strategies.
False signals from the CMF indicator
Like any other technical indicator, the Chaikin's Money Flow indicator develops movements that also tend to generate false signals, since it lacks other statistical variables specific to the market that can be analyzed by adding other technical indicators to our trading strategy.
Next, I will present an example of a false signal of the CMF indicator, for this I bring you a previous behavior of the price action of the BCT/USDT pair, note that the CMF indicator reveals a downward trend while the price action presents upward movements, note that thereafter the price action at no time was depreciated and on the contrary continues its upward movement, behavior that is subsequently accompanied by the CMF indicator being this a clear example of a false signal.
In the face of scenarios like this, the ideal would be to include other technical indicators in order to reduce the noise in the graphic analysis.
SOURCES CONSULTED
Tradingsim Chaikin Money Flow Indicator Review. Link
OBSERVATION:
The cover image was designed by the author: @lupafilotaxia, incorporating image: Binance
