The Chaikin Money Flow (CMF) indicator was developed by Marc Chaikin. This indicator measures the amount of money flow over a specific period. It also determines if the security is under accumulation or distribution, by comparing the closing price to the high and low price of the trading session. Moreover, it measures the momentum of the market, under the idea that price always follows volume.
The CMF fluctuates between the -1 and +1 level. It moves above/below the zero lines, just like an oscillator. It measures the bullish and bearish pressure for a given period. Chartists use the crossover above or below the zero lines to identify the bullishness or bearishness in the trend. When the indicator moves into the positive territory, it indicates a buying pressure, and when it moves into the negative territory, it indicates selling pressure.
This indicator is not developed to use it as a trading system. Instead, it is built to use it as a tool which helps to identify the trend of the market. If the security closes near the high of the day with increased volume, then the indicator increases by value. Conversely, if the asset closes near the low or below the recent low of the day with increased volume, then the indicator decreases by value.
Installing Chaikin Money Flow indicator in MT4 (Step-by-step procedure)
By default, the Chaikin Money Flow is not available in the MT4 Terminal, but it is available on the internet. Follow the link below to download the indicator.
Download the zip file from the above link, extract the file and then navigate to the MT4 directory/MQL4 as shown below.
Go to the ‘Indicators’ folder and paste the extracted file there.
Restart your MT4 Terminal.
Finally, to apply the indicator on your MT4 terminal, follow the step sequence given below.
Insert > Indicator > Custom > Chaikin Money Flow.
In the below image, the indicator is applied to the CHFJPY chart.
Trading Strategies using the Chaikin Money Flow indicator
CMF + RSI Indicator
In this strategy, we paired the CMF indicator with the RSI indicator.
The CMF measures the amount of money flow in a trading session, whereas RSI is an oscillator which oscillates between 0 to 100 levels. RSI is known as Relative Strength Index. This indicator is quite popular among the traders’ community. That is, it is used by everyone, from retail traders to banks, hedge funds, and Professionals.
When the CMF indicator goes slightly below the zero lines, it means that the market is in a downtrend. But, if it goes significantly below the zero lines, then the market is considered oversold. On the other hand, when the RSI indicator goes below the 30-level, it means that the indicator is oversold, and one can expect a reversal in the market.
As you can see in the image below, USDJPY was in the pullback phase, where the CMF indicator was way below the zero-line, and the RSI was also at the oversold area. This clearly indicates a buy signal.
The RSI overbought and oversold levels are quite strong levels in the market, so always place your stop-loss below the recent low where the RSI indicator indicated the Buy signal.
If the volatility is quite low in the market, then exit the trade at the most recent higher high. However, if you’re trading during the active market hours, especially in US session, then expect a brand new higher high.
When the RSI indicator reaches around the 70-level, it implies that the market is overbought. In other words, there is more demand than supply in the market. As a result, the price falls. On the other hand, when the CMF indicator goes significantly above the zero-line and gives a sharp reversal, it implies that the downtrend is going to begin in the market. Therefore, when both the indicators reach the overbought area, then it is a strong signal for us to go short on that particular security.
As you can see in the image below, the NZDJPY Forex pair was in a predominant downtrend. During the pullback phase, both the indicators reached the overbought area and gave us a reversal., indicating that the downtrend has come to an end and the market is ready to print brand new lower low.
When we pair an indicator with another indicator, then the signals become quite accurate in the market. If the trend is also super strong, then you can place the stop-loss just above the high of the previous candle. And, when the RSI indicator reaches the oversold area or if the price action starts next pullback then you can exit your trade.
CMF + Donchain Channels
In this strategy, we paired the CMF indicator with the Donchain Channels to identify the signals.
Donchain Channels is a leading indicator which is similar to Bollinger Bands. This indicator consists of three lines, which is generated by moving average calculations. It is basically formed by the lower and upper band around the mid-day range.
When the Donchain channels hit the lower channel, and the CMF indicator also goes below the zero-line giving a sharp reversal later, then we can consider going long.
As you can see in the image below, the AUDNZD forex pair was in a sideways market in the beginning. When the price hits the lower channel, and the CMF indicator also gives us a reversal below the zero-line, it indicates a buy signal in the market.
When the CMF indicator goes above the zero-line and gives us a reversal, then exit your trade.
Always use the recent low for the stop-loss, because none of the strategies is so perfect that it will go your direction as soon as you enter the trade. So, before activating your trade, always decide where you put your stop-loss.
For the selling, do the opposite of what is explained for the buy-side. For identifying sell trades, all you need to do is to find out when the Donchain Channels hits the upper channel, and the CMF indicator gives a reversal above the zero-line. Once this happens, you can prepare to go short.
As you can see in the image below, CHFJPY was coming from a pre-established downtrend. During the pullback phase, the price hits the upper channel, and the CMF also gives a reversal, indicating a perfect sign to sell this pair.
Many traders use the CMF indicator as a standalone indicator to trade in the market. However, we suggest you to always pair the indicator with candlestick patterns, price action or with any other indicator to identify accurate trading signals.
Also, the major problem with the retail traders is that they try so many strategies in the live market without even mastering it in a demo account. Hence, whichever strategy you’re going to try, always test it on a simulator first, and then apply on the live markets.
Chaikin Money Flow is an oscillator which measures the buying and selling pressure in the market. It is a strength indicator which is affected by the price action and volume of the market. When the indicator is positive, it means that the buyers are strong, and when the indicator is negative, it signifies that there is selling pressure in the market.
Hope you had a good read. Let us know if you have any questions in the comments below. Happy Trading!