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.