The Chaikin Money Flow indicator, developed by Mark Chaikin, was an improved version of his previous discovered indicator ‘Accumulation / Distribution’. Given this fact, Chaikin Money Flow indicator is much similar to its kin ‘Accumulation / Distribution’. Still it differs from the latter as it does not taken in consideration the opening price, but the mean currency price. The word money flow suggests that the calculation of a key value is based on the price & volume. Indexing these calculated key values depicts money flow. Traders using Accumulation / Distribution indicator may not have easy access to the opening prices. They may use CMF (Chaikin Money Flow), which is known as the “oscillating indicator”.
This indicator also is seen as an improvised version of the OBV. Unlike OBV, Chaikin Money Flow also considers the rise / falls in the currency price throughout the trading day, along with the previous closing price. In a bullish scenario, a currency’s closing price ought to be higher than the range of rise / fall values in the price of the currency. Traders go positive with such scenario as it indicates a positive signal. But when the currency closes at a price lower than the day’s range still with a higher volume, traders depict that as a weak currency. This may happen because when the currency price falls below the range on that particular day, the market often gets bearish. Such periods of rise / fall in currency prices, when considered, make this indicator more efficient of depicting the currency trends.
If CMF < = 0 Signal of Bearish Market, Increased Selling
It’s best to consider the time period for which the CMF shows 0 or negative value. If this has been witnessed for a longer time, it is understood that the selling has been in force for a longer time. This is the second way to judge the bearish scenario.
The third way to judge a bearish scenario is to check the degree or intensity of the oscillator. This is also known as the absolute degree of oscillator. If the neutral CMF value is 0, the bullish signal is indicated when the value rises above 0 and the bearish signal is indicated when the value falls below 0. For instance, a 0.15 CMF indicates bullish signal and –0.15 indicates bearish signal. Mark Chaikin has advocated the degree at +/- 0.25. +0.25 indicates strong bullish market, while –0.25 indicates strong bearish market. The degree gets more intense as and when it goes more positive or negative on the CMF value.
Mark Chaikin advocates not using two similar indicators. The reason is that two similar indicators would calculate the value based on more or less same factors, leading to indication of similar signals. Hence, Chaikin Money Flow can go well with either Moving Averages or Relative Strength Index. Chaikin also advises to use a time period of 21 days, which is ideally 1 trading month. A smaller time period may be good, but may prove not sufficient for a proper analysis. While a bigger time period (more than 21 days) may have lags.