Normally, indicators are used in Forex trading to support analysis and improve trading accuracy. Most traders use well-known indicators such as the RSI, Oscillator, and Moving Average. Today, Fxtoday will introduce you to the Chaikin Money Flow (CMF) indicator and explain how to use it.

What Is Chaikin Money Flow? 

The Chaikin Money Flow (CMF) is an indicator that measures trade volume over the past 20 days. This indicator is a curved line between -1 and 1, with a line at 0 separating buying and selling pressure. If the CMF line is in the buying zone, it indicates a high buying volume and is more advantageous to buy.

However, if the CMF line is in the zone of selling pressure, it indicates a significant volume of selling and that it is more beneficial to sell. Although the indicator oscillates between -1 and 1, the CMF line only reaches its maximum between -0.5 and 0.5. The values are categorized as extreme overbought and extreme oversold.

How to Trade Using the Chaikin Money Flow Indicator

As stated previously, CMF is an indicator that measures trade volume. Thus, CMF is used in trading to monitor periods of increased or decreased trade volume. A line with a value of zero will indicate whether there is more excellent buying or selling pressure. If the CMF line is above 0, it indicates that the buying volume on the market is more significant.

However, if the CMF line falls below 0, there is an increase in selling volume. The CMF is often a volume indicator used to determine overbought and oversold conditions, divergence and convergence, and an entry confirmation.

Example of Placing a Position with CMF

On the EUR/USD TF 1h chart, the latest price has climbed, and the price movement is Bullish Engulfing, indicating an upside reversal. The CMF line has broken up on the buying side, indicating that the market is experiencing more buying pressure. Nevertheless, it should be noted that the price has not yet broken past the resistance. At this point, you should wait for a breakout at the resistance before buying.

When the price can break out above the resistance level, the CMF will break out to the side, allowing further buying pressure to enter the market.

Key Elements of the Chaikin Money Flow Indicator

- The Chaikin Money Flow indicator is used to validate entry signals.

- Chaikin Money Flow is a market strength indicator that provides accurate information.

- The Chaikin Money Flow’s Limitations

- CMF is insufficient for analysis, so other indicators are still required.

- CMF cannot identify TP and SL points.

- When the market is sideways, CMF cannot be analyzed.

- CMF is not suitable for trading in small TF.

Conclusion

Chaikin Money Flow is a volume indicator used to determine the trade volume of a market. It can also indicate overbought-oversold and divergence-convergence very well. Therefore, CMF can be used to validate trade entries.

However, the CMF indicator is not ideal for individual analysis, which is a drawback. It cannot be used to analyze sideways markets or small TF, so additional tools are needed.

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