Chaikin Money Flow Trading Strategy: Day Trading Tips

No one can ever exhaust every resource provided on our site. Now that we have covered two simple strategies, we of course need to touch upon the topic of how to stop out of trades. Please remember, that without a stop loss strategy, danger is looming around the corner. Although this doesn’t look very attractive, imagine you execute not 3 but 30 scalp trades per day with this strategy. This way you will have the opportunity to reach 10 times higher profit. In this strategy, the point is to hit stocks for minimum profits and then exit the trade.

When CMF oscillates right around the zero line, this indicates relatively equal buying and selling pressure, and no clear trend. Traders use the CMF system as a tool for identifying and assessing the trends of stocks being traded. A potential trend reversal can be identified through possible divergences when the price action and the CMF move in opposite directions. Bullish divergence may appear when the price moves to a new low while the CMF does not follow the same movement and this is an indication that an upward trend may emerge. On the other hand, a bearish divergence is formed when the price moves to a new high while the CMF remains the same or even falls, indicating the possible beginning of a downward trend.

How to read Chaikin Money Flow Indicator?

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The smart money flow index can make the difference between success and failure. You should never enter a trade unless you know the cause behind the price movement. Even though this zero line cross appears simple enough, the reality is much choppier. Sometimes, Chaikin Money Flow indicator only briefly crosses the zero line with a move that turns the indicator barely negative or positive. There is no follow through and this zero line cross ends up becoming a bad signal. It is the role of chartists to use buffers and filter these signals by setting the bullish threshold a little above zero and the bearish threshold a little below zero.

Is Your Risk/Reward Enough?

The interactions between buy and sell orders, or in other words the supply and demand imbalances are what drives the price of any instrument and it’s the reality that matters the most. Once you understand the game behind the price action a new reality will be accessible to you. In simple terms, the smart money is the guys who have the power to move the market. Roughly 85% of the market is controlled by smart money, which is referred to as the institutional players. The terms “smart” and “dumb” don’t necessarily correlate with trader intelligence.

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• So if a stock has a short-term rally while Money Flow stays positive, this is confirms the move and doesn’t necessarily add any information.
• We can conclude that during trending markets, the Chaikin Money Flow formula is a useful indicator.
• We’ve mentioned so many times the term smart money that we need to clarify who is the smart money.

The second trade comes when the Chaikin breaks the zero level downwards. Three periods after the Chaikin signal, the Stochastic exits the overbought area, giving us a sell signal. As you probably know, the most common https://forexhero.info/why-interactive-brokers-is-a-brokerage-firm-you-can-rely-on/ disadvantage of oscillators is that they are not great standalone indicators. Therefore, let’s explore additional trading indicators you can use to validate signals provided by the Chaikin Money Flow Index.

Trend Lines

This occurs when price falls to a new low but the Chaikin Money Flow does not follow suit with a lower reading. The next step is to calculate the volume of money flow by multiplying the volume for the period by the money flow multiplier obtained in step one. It is usually calculated on a daily basis but can be figured otherwise, such as hourly or weekly. Divergences in price action and the CMF that move in opposite directions can indicate a potential trend reversal.

• The daily Money Flow calculation combines closing performance and volume confirmation to determine the magnitude and direction of buying or selling pressure.
• If the CMF itself is seen in an uptrend, the asset is considered accumulated or bought.
• Chartists can use the absolute value of Chaikin Money Flow to confirm or question the price action of the underlying.
• This way you will have the opportunity to reach 10 times higher profit.
• Notice that HOG formed a falling wedge that retraced just over 62% in August, when CMF was still in bull mode.

Sometimes the obvious doesn’t seem so obvious, so we feel the need to emphasize the fact that the price action is the effect and the money flow is the cause that makes the price move. The interpretation is that the smart money is selling at the end of the day while the dumb money is buying at the start of the day. The smart money index chart has helped professional investors to correctly predict the Black Monday 1987, the great financial crisis of 2017, and the dotcom crash.

Chaikin Money Flow confirms the market trend

Most trading software and charting platforms include the Chaikin Money Flow indicator, so you don’t have to do the calculations yourself. Some platforms express the indicator as a decimal by dividing it by 100, while other platforms indicate it as a value between 0 and 100. A value of 0.45 on one trading platform and 45 on another platform mean the same thing.

An example of what CMF cross signals look like is presented in the next graph. Join useThinkScript to post your question to a community of 21,000+ developers and traders. Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education.

Chaikin Money Flow Divergence Trading Strategy

As a result, if you know how to use the A/D line, the CMF will be a simple indicator. Now that we have covered a swing trade example, let’s dig into a few day trading strategies using the CMF. Investopedia does not provide tax, investment, or financial services and advice. Investing involves risk, including the possible loss of principal. The Chaikin Oscillator generates technical output that supports sound buy or sell decisions but is best used in conjunction with fundamentals and other indicators. Pivot points are an excellent leading indicator in technical analysis.

Despite this jump, the close was near the low for the day, which insured a Money Flow Multiplier near -1. As a result, almost all of the day’s volume was counted as negative money flow and the Chaikin Money Flow fell. The chart above shows Freeport McMoran (FCX) with 20-day Chaikin Money Flow in the indicator window.