Who would have thought, it's been a year since we published an article for your trading training... I know, I'm good at writing, what my mood is with the recession in the United States; It is not known where. Well, without getting too carried away, it makes my face go crazy. In the last installment of the trading training articles we talked about the Keltner canal, an indicator very similar to Bollinger bands but more precise. As you can see, we are updating the portfolio of indicators so that there is enough variety. That is why today we are going to talk about the CMF, an indicator that allows us to measure the dominant strength of an asset.
What is the CMF indicator?
Let's start the trading training by explaining what this indicator is about. The CMF (Chaikin Money Flow) indicator is an indicator used to measure the volume of money flow during a given period of time. It is an indicator created by Marc Chaikin (hence his name), a stock market analyst who also created the Chaikin oscillator (we will explain it to you in another article). This indicator may have some similarity to the Elder Ray indicator, one of the indicators that we have taught in previous installments of the trading training series. Its usefulness lies in measuring the buying and selling pressure of a security for a single period. In this way, the CMF can be used as a way to further quantify changes in buying and selling pressure and can help us anticipate future changes and therefore opportunities.
How is the CMF indicator measured?
Let's now see how this indicator is measured to understand in depth how it works. As we have commented in the previous paragraph of this trading training, the CMF bears a certain resemblance to the Elder Ray indicator, although only in appearance, given that the calculation formula for this indicator is totally different.
This indicator is made up of a green line that oscillates between the values of +1 and -1, with the value zero being the neutral point. This would be the format that the Tradingview application offers us for this indicator, but to facilitate reading the indicator, we recommend that you use the script created by a user called “nj_guy72”, which has 726 downloads. The difference is that the indicator provided by Tradingview (upper indicator) only shows us a single color, and the one we mentioned (lower indicator) visually makes it easier to read the indicator.
How is CMF calculated?燐
The CMF is calculated using a three-step formula that is applied over the periods that are determined. With the result of this calculation we obtain the value of the CMF. The calculation formula is made up of these steps: 1. First, we calculate the money flow multiplier: [(Close – Minimum) – (Maximum – Close)] / (Maximum – Minimum) = Money flow multiplier. 2. We calculate the volume of money flow: Money flow multiplier x Period volume = Money flow volume. 3. With the two values that we have obtained, we calculate the CMF:
Sum of 21-period Money Flow Volume / Sum of 21-period Volume = 21-period Chaikin Money Flow.
How can we take advantage of the CMF for our trading training?
Now that we have seen what this indicator is, how it is measured and its calculation formula, let's follow the trading training to see how to interpret it. As we have mentioned, the indicator is an oscillator that allows us to measure the strength of the market. Buying and selling pressures can be determined by the close of a period relative to its high/low range. If the period closes in the upper half of the range, the buying pressure is greater. On the other hand, if the period closes in the lower half of the range, the selling pressure is greater. This is what determines the cash flow multiplier. The money flow multiplier is what determines the money flow volume and therefore ultimately the Chaikin money flow (CMF). Therefore, the interpretation of the indicator is very simple: if the CMF is closer to 1, the buying pressure is predominant. On the other hand, if the CMF is closer to -1, selling pressure is predominant.
Buying and selling pressure can be a good way to confirm an ongoing trend. This can give the trader an additional level of confidence that the current trend is likely to continue. During an uptrend, continued buying pressure (CMF above 0) may indicate that the asset's price will continue to rise. On the other hand, during a downtrend, continued selling pressure (CMF below 0 0) may indicate that the asset's price will continue to fall.
As we have seen in the interpretation of other technical indicators, crossings of the values of an indicator through the zero level also provide us with very useful information. When we witness a bearish crossing of the CMF below zero, we can see how the price of the asset is subsequently falling. On the other hand, when we see a bullish crossing of the CMF above zero, we can see how the price of the asset subsequently rises.
Conclusions from this trading training on the CMF indicator.
After concluding this trading training on the CMF indicator, let's review the most important points to take into account. This indicator, as we mentioned at the beginning, is suitable for measuring the buying or selling pressure of an asset. At the same time, we have learned the formula with which the parameters of the indicator are calculated and how we can use the indicator to capture signals to enter the market safely. As a personal recommendation, I have told you about using the indicator that shows the values in colors to facilitate reading, although the one provided by Tradingview is also suitable. To taste colors and never better said. To finish the explanation, if you are going to use the indicator in Tradingview you can change the value of the period with which the indicator is calculated so that it gives you data that is earlier or later. That can depend on each person's convenience, if you use short or long periods of time, of course.