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Chaikin Money Flow Volume Trading Strategies To Find High-Probability Signals - YouTube
Channel: The Secret Mindset
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Chaikin Money Flow is a technical indicator
which determines if an instrument is under
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accumulation or distribution.
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The Chaikin Money Flow compares the closing
price to the high-low range of the trading
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session.
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• if the price closes near the high of the
session with increased volume, the Chaikin
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Money Flow increases in value
• if the price closes near the low of the
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session with increased volume, the Chaikin
Money Flow decreases in value.
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Chaikin Money Flow measures buying and selling
pressure over a set period of time and is
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a popular indicator among the traders who
use volume technical analysis.
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Along with the On Balance Volume, the Chaikin
Money Flow is tracking the Money Flow on a
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market.
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What are the setting of this volume indicator?
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Traders generally use 20-periods or 21-periods
for calculating the Chaikin Money Flow indicator.
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Some traders also use the 50-period Chaikin
Money Flow to determine the accumulation /distribution
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on the longer term.
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• Chaikin Money Flow settings with values
over 30 make the indicator less sensitive.
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This will result in fewer, but better quality
signals
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• Chaikin Money Flow settings with values
below 20 make the indicator over-sensitive.
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This will result in more market noise.
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Lower settings on the Chaikin Money Flow indicator
should be carefully traded, as it can lead
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to many false signals
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How To Read Chaikin Money Flow
Chaikin Money Flow is used by traders to confirm
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the market trend.
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CMF values above zero indicate an uptrend
while CMF values below zero suggest a downtrend.
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• when the Chaikin Money Flow indicator
is above 0-level this is a bullish signal
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• when the Chaikin Money Flow indicator
is below 0-level this is a bearish signal
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The Chaikin Money Flow usually stays between
-0.5 and 0.5 levels and rarely reaches its
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maximum/minimum values of -1 and 1.
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A movement of the Chaikin Money Flow oscillator
from negative to positive or vice versa does
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not suggest a change in trend.
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So remember this observation because in choppy
markets the CMF generates many false signals.
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The Chaikin Money Flow is also used by traders
to confirm the strength behind an uptrend
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or a downtrend.
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In this regard, the indicator resembles the
Average Directional Movement (ADX), which
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also measures trend strength.
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Chaikin Money Flow confirms the breakouts
of support and resistance levels.
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During an uptrend, if a breakout of a resistance
occurs while the CMF reaches new highs, this
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suggests that the bulls are taking control
of the market.
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This is a signal of an uptrend continuation
During a downtrend, if a breakout of a support
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occurs while the CMF reaches new lows, this
suggests that the bears are taking control
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of the market.
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This is a signal of a downtrend continuation
However, the Chaikin Money Flow has a flaw.
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The CMF is not handling gaps very well.
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For example, if a gap occurs on the upside
and closes at a lower price, the money flow
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would give you a negative figure, despite
the bullish price increase.
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How to Read Market Conditions with Chaikin
Money Flow
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• values between 0.05 – 0.25 indicate
buying pressures from the bulls.
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This is a sign of accumulation and that the
market trades in an uptrend.
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• values between 0.25 – 0.4 indicate that
the bulls are in control of the market.
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This indicates that the market is in a strong
uptrend
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• values between 0.4 – 1 indicate that
the bulls are in full control of the market.
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This indicates that the market is in a very
strong uptrend
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• values between -0.05 – -0.25 indicate
selling pressures from the bears.
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This is a sign of distribution and that the
market trades in a downtrend.
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• values between -0.25 – -0.4 indicate
that the bears are in control of the market.
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This indicates that the market is in a strong
downtrend
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• values between -0.4 – -1 indicate that
the bears are in full control of the market.
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This indicates that the market is in a very
strong downtrend
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• values between -0.05 – 0.05 signals
a decision-making period.
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When the CMF trades between these levels,
the bulls and bears are putting pressure to
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take control of the market.
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This area is often marked by choppiness and
is better to be avoided.
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How To Trade With Chaikin Money Flow
One of the most common ways in which traders
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use the Chaikin Money Flow indicator is to
take signals when the oscillator crosses the
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zero level.
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• when CMF indicator crosses above zero,
a buy signal is generated
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• when CMF indicator crosses below zero,
a sell signal occurs
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If we analyze this chart, we can observe some
decent signals offered by the Chaikin Money
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Flow indicator.
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But being a volume indicator, by itself, the
CMF is not so reliable and it will offer many
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false signals.
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It’s better to confirm the trend with another
indicator.
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In this case, I like to use my old reliable
200-period moving average in order to determine
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the prevailing trend.
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• When the price trades above the 200-period
exponential moving average, we consider taking
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only long entries.
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• When the price trades below the 200-period
exponential moving average we consider taking
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only short entries.
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Now, entering the market is much simpler.
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We wait for the Chaikin Money Flow indicator
to cross above the 0-level, above 200-EMA
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for a long entry and we wait Chaikin Money
Flow indicator to cross below the 0-level,
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below 200-EMA for a short entry.
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And here an even better entry.
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A smarter way to trade the Chaikin Money Flow
would be to plot the 0.05 and -0.05 levels.
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In this way, you filter the choppiness around
the 0 level.
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• Take short entries below -0.05 level
• Take long positions above the 0.05 level
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Here are a few examples of valid CMF trades.
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Another strategy involves applying a moving
average on the indicator.
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By adding a moving average on the Chaikin
Money Flow’s chart window, you can take
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crossover signals,
Now, when you want to trade a crossover between
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the Chaikin Money Flow oscillator and a moving
average, you should be aware of an important
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thing.
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A crossover will catch good movements when
markets are trending.
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When markets are trading in a range, this
system is subject to false signals, which
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will lead to losing trades.
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A longer-term moving average added on Chaikin
Money Flow will work better than short-term
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moving average.
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A longer-term moving average will produce
fewer signals.
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Also, this is not enough.
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This approach will generate many false signals
if you don’t confirm the trend with other
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indicators.
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You cannot take a crossover signal without
knowing the market trend.
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That’s why I prefer to determine the prevailing
trend in the market with Ichimoku indicator.
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For this setup, I plot only the Kumo cloud.
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So we plotted the Kumo cloud and we added
a 200-period moving average on the Chaikin
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Money Flow indicator with a 21-period input.
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And the setup is simple:
• Buy only signals above the Kumo cloud,
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when the Chaikin Money Flow crosses above
the 200-period moving average
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• Sell only signals below the Kumo cloud,
when the Chaikin Money Flow crosses below
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200-period moving average
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Also, very important…We don’t take entries
when the price is inside the Kumo cloud.
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If a crossover between Chaikin Money Flow
and the 200 EMA occurs when the market price
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is inside the Kumo cloud, we ignore the setup.
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We could enter a trade once the price closes
above or below the cloud, in the direction
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indicated by the crossover.
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But never when the price is inside.
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Here are some examples of valid trades, with
the Kumo cloud as trend filter.
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Chaikin Money Flow is a very useful indicator
for confirming the direction of the main trend.
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It works well during trending market conditions
and is very good at confirming the strength
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of the main trend.
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In what concerns its limitations, in a choppy
market, many false signals are generated around
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the zero level, so be aware of this.
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Also, CMF value is not accurate when big gaps
occur on the market so when you spot larger
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gaps, maybe you should re-analyze the setup.
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I also found the Chaikin Money Flow quite
unreliable on smaller time frames like M1
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or M5, so I would pay extra attention when
using it for scalping.
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