chaikin money flow(CMF)

Chaikin money flow was created by Mark chaikin.

Chaikin money flow is an indicator that is used to measure money flow volume over a given period of time.

Chaikin money flow is an oscillator and therefore has an oscillation at point 0 ranging from -0.5 to 0.5.

Chaikin money flow is based on centerline,overbought and oversold as well as divergence.

Chaikin money flow is therefore calculated using the following steps;

-calculating the money flow multiplier as follows;

money flow multiplier= {(close-low)-(high-close)}/(high-low)

-calculating the money flow volume as follows;

money flow volume= money flow multiplier* volume of a given period

-From the two results,the chaikin money flow is therefore calculated as follows;

21 period CMF= 21 period sum of money flow volume/21 period sum of volume

Since chaikin money flow is based on centerline,it therefore follows that when the chaikin money flow crosses above 0 that will be an indication of a bullish market thus the trader should be trading upwards while when the chaikin money flow crosses below 0 that will be an indication of a bearish market thus the trader should be trading downwards.

Based on overbought and oversold,it therefore follows that when chaikin money flow crosses above 0.2 when it is in a bullish condition,that will be an indication of an overbought market thus the trader should close any buy position and enter a sell position since the market will start moving downwards.On the other hand,when the chaikin money flow crosses below -0.2 when it is in a bearish condition,that will be an indication of an oversold market thus the trader should close any sell position and open a buy position since the market will start moving upwards.This is indicated as from the candle sticks chart below;

From the candle sticks above,there are 3 points,A,B and C.Point A represents an oversold market while point B represents an oversold market.Point C represents the chaikin money flow .

At point A,the chaikin money flow has crossed below -0.2 thus an indication of an oversold market at that point.This will signal the trader to close any sell position at that point and open a buy position since the market is starting to move upwards.On the other hand,at point B ,the chaikin money flow has crossed above 0.2 thus an indication of an overbought market at that point .This will signal the trader to close any buy position and enter a sell position since the market is starting to move downwards.

Recommendation:If you are a day trader just use 1 min,5 min,15 min and 30 min timeframe while if you are a swing trader just use 1 hour and above timeframe if you want chaikin money flow to work well for you