Chaikin Money Flow 34

Chaikin Money Flow

Developed by Marc Chaikin, ChaikinMoney Flow measures the amount of Money Flow Volume over a specific period.Money Flow Volume forms the basis for the Accumulation Distribution Line.Instead of a cumulative total of Money Flow Volume, Chaikin Money Flow simplysums Money Flow Volume for a specific look-back period, typically 20 or 21days. The resulting indicator fluctuates above/below the zero line just like anoscillator. Chartists weigh the balance of buying or selling pressure with theabsolute level of Chaikin Money Flow. Chartists can also look for crosses aboveor below the zero line to identify changes on money flow.

Chaikin MoneyFlow Interpretation and forexsignals

Chaikin Money Flow (CMF) is anoscillator that fluctuates between -1 and +1. Rarely, if ever, will theindicator reach these extremes. It would take 20 consecutive closes on the high(low) for 20-day Chaikin Money Flow to reach +1 (-1). Typically, thisoscillator fluctuates between -0.50 and +0.50 with zero as the centerline.

Chaikin Money Flow measures buyingand selling pressure for a given period of time. A move into positive territoryindicates buying pressure, while a move into negative territory indicatesselling pressure. Chartists can use the absolute value of Chaikin Money Flow toconfirm or question the price action of the underlying. Positive CMF wouldconfirm an uptrend, but negative CMF would call into question the strengthbehind an uptrend. The reverse holds true for downtrends.

Buying/Selling forex signals

Chaikin Money Flow can be used todefine a general buying or selling bias simply with positive or negativevalues. The indicator oscillates above/below the zero line. Generally, buyingpressure is stronger when the indicator is positive and selling pressure isstronger when the indicator is negative.

While this zeroline cross seems simple enough, the reality is much choppier. Chaikin MoneyFlow sometimes only briefly crosses the zero line with a move that turns theindicator barely positive or negative. There is no follow through and this zeroline cross ends up becoming a whipsaw (bad signal). Chartists can filter thesesignals with buffers by setting the bullish threshold a little above zero(+0.05) and the bearish threshold a little below zero (-0.05). These thresholdswill not entirely eliminate bad signals, but can help reduce whipsaws andfilter out forex signals .

The chart above shows FreeportMcMoran (FCX) with 20-day Chaikin Money Flow in the indicator window. Therewere at least 10 crosses of the zero line between February and December 2010.Adding a small buffer greatly reduced the number of bullish and bearishsignals. A move above +0.05 was considered bullish, while a move below -0.05was considered bearish. There were only three signals. While these signals willcome a little later, it may be worth it to reduce whipsaw.

The chart forHarley Davidson (HOG) shows a few good signals and a whipsaw with the Maybounce. CMF moved above +0.05 for a few days, but this move failed to hold andthe indicator broke back below -0.05 in early June. Whipsaws are going tohappen, especially during volatile periods or when the trend flattens. CMFturned bullish in July and stayed bullish the rest of the year. Notice that HOGformed a falling wedge that retraced just over 62% in August, when CMF wasstill in bull mode. This pullback offered a second chance to partake in the CMFforex signals .

Chaikin Money Flow is not suitedfor all securities. The chart above shows P.F. Chang (PFCB) with some 18crosses above +0.05 or below -0.05. Basing CMF signals on these crossesresulted in one whipsaw after another. It is important to analyze the basicprice trend and the characteristics of an indicator with a particular security.PFCB exhibits some trend, but price action within this trend is choppy andmoney flow cannot maintain a positive or negative bias. It would be better tofind a different indicator for this stocks.

forex signals Conclusions

Chaikin MoneyFlow is an oscillator that measures buying and selling forex signals over a set period of time. At its most basic,money flow favors the bulls when CMF is positive and the bears when negative.Chartists looking for quicker money flow shifts can look for bullish andbearish divergences. Be careful though. Selling pressure still has the edge innegative territory, even when there is a bullish divergence. This bullishdivergence simply shows less selling pressure. It takes a move into positiveterritory to indicate actual buying pressure. As a money flow oscillator, CMFcan be used in conjunction with pure price oscillators, such as MACD or RSI. Aswith all indicators, Chaikin Money Flow should not be used as a stand-aloneindicator. Marc Chaikin also developed the Accumulation Distribution Line andthe Chaikin Oscillator.

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