Chaikin Money Flow Indicator - Crypto Academy S4W6 - Homework Post for @kouba01

Hi guys, welcome to a new week at steemit crypto academy. Today I'll be making a post about the Chaikin Money Flow indicator. This post is my homework submitted to the professor @kouba01.

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Chaikin Money Flow indicator Is a volume-weighted average of accumulation and distribution over a specified period. In addition, this indicator is used to measure the buying and selling pressure present in a security over a set period. Just like indicators in general, the display of CMF is presented using a moving line and will show a number with a range of 1 to -1 which will indicate the distribution phase with 0 as the centerline which will indicate the distribution phase.

_{Image from Huobi Exchange and edited by @erode}

The indicator generated oscillates below or above the 0 lines. Above 0 is considered a bullish trend while below 0 indicates a bearish trend but it is not advisable to use this indicator alone to determine the trend rather it is more useful to measure the strength of the market.

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Calculation of Chaikin Money Flow (CMF)

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To calculate the CMF indicator value, We need to use three different formulas to fetch the Chaikin money flow value.

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• The money flow multiplier (MFM) = [ (close – low) – (high - close) ] / (high - low)

• MFV = MFM x Trade Volume

• CMF = Total MFV /Total Volume

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For example lets take these values for calculation.
Close = $8
high = $11
Low = $7
Period volume = $25
Total period volume = $1000

MFM = [(8-7)-(11-8)] / (11-7)

= -2/4
= -0.5

MFV = -0.5*25
= -12.5
CMF = -12.5/1000 = -0.0125

Hence therefore my CMF value is -0.0125

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Demonstrate how to add the indicator to the chart than the trading view platform. Highlighting how to modify the settings of the best period

I will be demonstrating using the Huobi Exchange. We begin by logging into the Huobi platform and selecting the steem cryptocurrency to demonstrate with.

_{Image from Huobi Exchange and edited by @erode}

Click on the index symbol on the chart which I mentioned in the above image. This will show the entire indicators on the exchange.

_{Image from Huobi Exchange and edited by @erode}

Here we are in need of CMF hence I searched and found the Chaikin money flow indicator.

_{Image from Huobi Exchange and edited by @erode}

To change the setting you can click on the indicator set through the setting symbol on the chart as I mentioned above.

_{Image from Huobi Exchange and edited by @erode}

You can also change the line color and its size at our convenience.

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What is the role of the indicator in the confirmation of the direction of the trend and determining entry and exit points for buy and sell

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The CMF Indicator can confirm trends as there is a good correlation between price movement and the flow of money in and out of an asset. If money flows into an asset, this indicates buying pressure, increasing demand leading to an uptrend in price action.

If CMF is moving above zero towards the positive side on increasing volume and price, it confirms the direction of the trend in a bullish direction, and buy entry can be spotted. In terms of money flow, it can be understood as the flow of cash is increased.

On the other hand, if CMF moves below the zero line on increasing volume. It indicates a strong bearish trend and sell opportunities can be spotted.it means that the cash is flowing out.

_{Image from Huobi Exchange and edited by @erode}

Here you can see I demonstrated the chart with STEEM/USDT pair. Here the CMF line moves below the 0 lines hence we are facing the market change along with it.
The Chaikin Money Flow indicator is a measure of closing prices against the price range. When the price closed at the upper half of the price range for the same period, we say there's buying pressure, and buying pressure implies that accumulation is ongoing for the asset. when the price closed at the lower half of the price range for the same period, we say there's selling pressure, and selling pressure implies that distribution is ongoing for the asset.

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Trade with a crossover signal between the CMF and wider lines such as +/- 0.1 or +/- 0.15 or it can also be +/- 0.2, identify the most important signals that can be extracted using several examples. (screenshot required)

Crossover signal strategy is used to avoid the generation of fake signals through Chaikin money flow (CMF) indicator because if we look closely at the indicator value it sometimes crosses the midpoint value up or down indicating buying and selling points but it does not really go further bullish or bearish and bounce back from its value which results in losing the money of the trader. Below is the screenshot of this example;

Trading with crossover is one more way of using CMF. We have to look for crossover between CMF and wider lines +/- 0.1 and or +/- 0.2. The concept is simple to understand. Take a buy position when CMF crosses +0.1 line from below upwards and take sell position when CMF crosses -0. 1 line from above downwards.

_{Image from Huobi Exchange and edited by @erode}

The buy signal is confirmed when we have the indicator line crosses above the -0.10 level multiple times. It gives the confirmation that the market is going into a bullish manner and it tried to break the resistance multiple times.

_{Image from Huobi Exchange and edited by @erode}

The sell signal is confirmed when we have the indicator line crosses below the -0.15 level which moved from above the 0.10 level. The proper entry is done at the close of the current candle after the cross. The exit point is placed above the recent swing point and the take profit can be set to risk to reward ratio of 1:1 as we can see below.

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How to trade with a divergence between the CMF and the price line? Does this trading strategy produce false signals? (screenshot required)

Divergence is an occurrence where the price movement forms a higher high but the oscillator indicator forms a lower high in the same period or when the price movement forms a lower low but the oscillator indicator forms a higher low in the same period.

In the bullish divergence, the Chaikin Money Flow Indicator shows the Bullish movement, while in the charts the price movement goes downwards. So that shows that the downtrend is about to end, so after that, the price goes in the Bullish trend as you can see in the above image.

_{Image from Huobi Exchange and edited by @erode}

The above image is the trading pair of BTC/USDT you can see here the CMF indicator moving in the up direction and the actual price chart is in the down direction resulted in the bullish divergence finally we can see the bullish trend.

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In the bearish divergence, the Chaikin Money Flow Indicator shows the bearish movement, while in the charts the price movement goes upwards. So that shows that the uptrend is about to end, so after that, the price goes in the bearish trend as you can see in the above image.

_{Image from Huobi Exchange and edited by @erode}

The above image is the trading pair of BTC/USDT you can see here the CMF indicator moving in the down direction and the actual price chart is in the up direction resulted in the bearish divergence finally we can see the bearish trend.

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Does False Signal Given By The CMF Divergence Strategy

As we all know we all are not 100% genuine likewise not all the indicators work 100%. But it will show the maximum possibility. I am saying here maximum of the signal given by the CMF divergence may work. In order to confirm that we have to use two or more indicators to verify it. To increase the quality of investment opportunities while also filtering out misleading and false signals, the best method is to combine the Chaikin Money Flow indicator with other technical indicators.

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Conclusion

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I need to thank the author @kouba01 for giving me the wonderful opportunity to learn about the CMF indicator. The CMF indicator is used to measure the flow of money in and out of an asset to confirm trends and predict trade signals. The CMF indicator is a volume-based indicator that can confirm trends when the CMF line moves in the same direction as price. It is simple to use and configure. It can be a beneficial tool when used along with other indicators and we can enjoy the benefit of it :)

Thank you