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

Hello everyone. I welcome you all in 6th week of crypto academy. In this lecture, the professor @kouba01 taught us the Chaikin Money Flow Index. This is my homework post.

Screenshot (3621).png

Screenshot (3552).png

Q1. In your own words, give a simplified explanation of the CMF indicator with an example of how to calculate its value?

The Chaikin Money Flow is an average volume based indicator which was developed by the Marc Chaikin. This indicator is use to demonstrate the selling and buying pressure of the traded market by determining the cash inflow and outflow. This volume cash flow is expressed as the distribution and accumulation of the asset for a specific period of the time. This indicator is being used by multiple traders in crypto market which not only demonstrate the buying and selling pressure, but this indicator also indicate the good buying and selling spots in an assets market.

The value of the CMF is move between -1 to 1. The 0 is the central value which is known as the mid point. When there is the increasing volume and CMF indicator cross the mid point and move toward the 1, it denote the high buying pressure of the asset.

When the CMF cross the mid point and move toward the -1, it denote that the selling pressure is high in the market.

When the CMF indicator is applied on a chart, it demonstrate whether the market the market is in accumulation phase or distribution phase by seeing the closing of the candle for a specific period of the time. When the closing price of the candle is close to the high, then the accumulation phase is there in the market which show that the buying pressure is high. With high buying pressure, the market will rise up and the bullish trend will take place in market.

When the closing of the candle is close to the low, then this show the distribution phase in the market which show that the selling pressure is high. With the high selling pressure, the market will move downward and the bearish trend will take place in the asset's market.

Screenshot (3552).png

CMF Indicator Calculation


To calculate the CMF, we use the following formula.

  • Chaikin Money Flow =Sum of n periods of Money Flow Volume / total observation of periods of volume.


In the above formula, we use the value of money flow volume. This is obtained by multiplying the monye flow multiplier with the volume for the specified period. To calculate the money flow volume, we use the following formula.

  • Money Flow Volume = MFM x Volume for the specified given period of time.



In the formula of the money flow volume, we use the value of money flow Multiplier, the below if the formula to calculate the money flow multiplier

  • Money Flow Multiplier = [(Close Price - Low price) - (High price - Close Price)] / High price - Low Price

First we have to calculate the MFM, then put the value of MFM in MFV, then after calculating the MFV, we put its value in the CMF formula and obtain the CMF's value.

Screenshot (3552).png

OR

  • Chaikin Money Flow = observation period [((Closing price - Low price) - (High price - Closing price)) / (High price - Low price) × current Volume)] / Sum of n period of volume)

Screenshot (3552).png

Example

Suppose we have the values as follow:

Closing price = 3520$

High price =5400$

Low price =2670$

Volume Period = 10000$

Total period volume=30000$

Screenshot (3552).pngFirst we calculate the MFM

MFM= [(Close Price - Low price) - (High price - Close Price)] / High price - Low Price

MFM = (3520$ - 2670$) - ( 5400$ - 3520$) / (5400$ - 2670$)

MFM = 0.377

Screenshot (3552).png

Now we will calculate MFV

MFV = MFM x Volume for the specified given period of time.

MFV = 0.377 x 10000

MFV = 3770

Screenshot (3552).pngChaikin Money Flow =Sum of n periods of Money Flow Volume / total observation of periods of volume

CMF = 3770/30000

CMF = 0.12

We have the Chaikin Money Flow value = 0.12, which mean that the CMF have crossed the 0 middle point and now moving up toward 1. This denote that the buying pressure is high and market is in accumulation phase.

Screenshot (3552).png

Q2 Demonstrate how to add the indicator to the chart on a platform other than the tradingview, highlighting how to modify the settings of the period(best setting).(screenshot required)

- Visit Goodcrypto website

Screenshot (3607).png

  • To access the chart section, we first click on the Trade button as shown in the screen short.

Screenshot (3606).png

  • Click on the indicator button as shown in the below screen short.

Screenshot (3605).png

  • Search for the Chaikin Money Flow indicator

Screenshot (3604).png

  • Click on it and it will apply on your chart.

Screenshot (3603).png

  • To change the setting, click on the indicator and then open the setting.
  • Screenshot (3600).png

    • You can change the period according to your own needs. By default, it is 20

    Screenshot (3599).png

    • You can change the style too.

    Screenshot (3598).png

    Screenshot (3552).png

    Best setting of CMF(for me)

    The CMF indicator has the default period of observation as 20 or 21 which is best for me because this will help to give the best buying and selling spots in the market. The high indicator setting will not give this much selling and buying opportunities because of high signals. So the default setting would go best for me.

    Choosing the setting of an indicator mean the volume of the noise which you are ready to face and bear in trading. The setting is different for different traders according to their needs and trading strategy. The traders set the setting according to their own needs. The low indicator setting is best for short term traders because in such setting, you get the early signals. For long term indicators, the high indicator setting will go best.

    The best indicator setting can be determined by considering the indicator nature, the need of the trader and also the behavior of the CMF when combining the indicator with other indicators.

    Screenshot (3552).png

    Q3 What is the indicator’s role in confirming the direction of trend and determining entry and exit points (buy/sell)؟(screenshot required)

    The CMF indicator help to identify the selling and buying pressure of an assets through the accumulation and distribution for a specific time period. The high accumulation mean the high buying pressure and the distribution phase indicate the high selling pressure, this indicator also help to get the best buying and selling opportunities. This is based on the money flow volume and the value of this indicators varies between -1 and 1. These values help to identify the market trend. If the CMF cross 0 and move in negative side, it indicate the bearish trend. When the CMF cross 0 and move toward positive side, it indicate the the bullish trend.

    Screenshot (3552).pngUptrend

    When the CMF cross 0 and move in upward direction, mean move in positive direction, it indicate that the market is rising up. This show the uptrend or bullish season in the market. The buying pressure is high which denote that the accumulation is high.

    Screenshot (3612).pngScreenshot (3552).pngDowntrend

    When the CMF move below the mid point or 0 point, it demonstrate that the market is in downtrend. In this stage, the selling pressure is high which mean that the distribution is high. The CMF move below zero point in negative direction.

    Screenshot (3611).png

    Screenshot (3552).png

    Buy Entry and Exit points

    Screenshot (3608).png

    In the above screen short, we get the best entry and exit spots. When the CMF cross the 0 and move in positive direction, mean in upward direction, this is the best spot to enter into the market. We know that the buying pressure is getting high which will result in occurrence of bullish trend. So we should enter into the market. When the CMF cross 0 and move in downward direction, we should exit from the market.

    Screenshot (3552).png



    Sell Entry and Exit points

    Screenshot (3610).png

    When the CMF cross 0 and start moving in downward direction, this give us the best entry spot. When the CMF start moving in opposite direction, this is the best exit opportunity.

    Screenshot (3552).png

    Q4. 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)

    The CMF crossover is method which is used by the traders . This strategy involve the crossing of the CMF cross over some pre determine values. These values include +/- 0.1, +/-0.15, +/-0.2

    We get a crossover buy signal when the CMF line cross above the +0.1 from below. This is the best entry spot. When the CMF line cross the below -0.1 from the above, this is the best selling spot. This is the best point to sell our assets and to earn profit.

    Screenshot (3552).png

    CROSSOVER SIGNAL (+/-0.15)

    Screenshot (3613).png

    From the above screen short, we observed that the CMF line crossed from the +0.15 to -0.15. I will place a sell order whenever this sort of the crossover is observed in the market. The stop loss and take profit ratio was 1:1.5

    Screenshot (3552).png

    Scenario 2- CROSSOVER SIGNAL (+/-0.2)

    Screenshot (3618).png


    In the above screen short, we get a spot when the CMF line cross the 0.2 in positive direction and move in bullish trend. I placed a buy order by setting the take profit and stop loss. The take profit is above the candle in the chart. This will help us to take more profit and stop loss will help to save us from any big lose of money


    Screenshot (3552).pngScenario 3- Crossover Signal (+/-0.1)

    Screenshot (3619).png
    In above scenario, i get a good spot when the CMF line cross the +0.1 point and move in downward direction. The line was moving toward bearish trend. I set top loss and take profit ratio and then place sell trade order. The take profit was placed below the candles the lowest candle.

    Screenshot (3552).png

    Q5. How to trade with a divergence between the CMF and the price line? Does this trading strategy produce false signals?(screenshot required)

    A divergence signal mean when the price of the asset on the chart do not match with the indicator. When the price of the coin and the movement of the CMF line do not match with each other, the divergence signal occur. In simple word, we can say that the price is moving in direction opposite to the indicator.

    If the price is moving upward but the indicator show the bearish signal, the divergence signal occur. And similarly, when the indicator show the bullish signal but the price move in downward direction, the divergence signal occur.

    Screenshot (3552).png

    Bearish Divergence

    When the price of the coin is rise up but the indicator move in downward direction, the bearish divergence occur. This signal give you opportunity to sell your assets. This is good selling spot.

    Screenshot (3616).png

    In the above screen short, the CMF move in downward direction, but the price is rising upward. There are the high-high move in the price movement on the chart but the CMF indicator is moving in the downward direction having the lower-low moves.

    Screenshot (3552).png

    Bullish divergence

    When the price of the coin is moving downward but the indicator move in upward direction, the bullish divergence occur. This signal give you opportunity to buy your assets. This is good buying spot.

    Screenshot (3615).png

    In the above screen short, the CMF move in upward direction, but the price is falling down. There are the high-high move in the CMF movement on the chart but the price of coin moving in the downward direction having the lower-low moves.

    Screenshot (3552).png

    False Signal

    No indicator is 100 accurate. There are always some week points in the indicators because of which, they may produce the false signals sometime. SO we should we the CMF indicator while combining with other indicators. When we use any indicator combining with others, the accuracy of result get high.

    Screenshot (3617).png

    In the above screen short, i have combined the CMF with William %R indicator. The price is rising upward but the CMF showing the downward signal. We can see that this is a false signal because of upward movement of William %R indicators. So this will help us to safe from making any false trading decision and losing money.

    Screenshot (3552).png

    CONCLUSION


    The Chaikin Money Flow indicator is use to demonstrate the selling and buying pressure of the traded market by determining the cash inflow and outflow. This volume cash flow is expressed as the distribution and accumulation of the asset for a specific period of the time.

    The value of the CMF is move between -1 to 1. The 0 is the central value which is known as the mid point. When there is the increasing volume and CMF indicator cross the mid point and move toward the 1, it denote the high buying pressure of the asset. When the CMF cross the mid point and move toward the -1, it denote that the selling pressure is high in the market. Combining the CMF with other indicator enhance the accuracy and efficiency of this indicator and result are more reliable.

    Thanks to Professor @kouba01 for this amazing and informative lecture.

    Sort:  
     2 months ago 

    Hello @ahmadchemist737,
    Thank you for participating in the 6th Week Crypto Course in its 4th season and for your efforts to complete the suggested tasks, you deserve a Total|7/10 rating, according to the following scale:

    OriginalityCompliance with topicConsistency of methodQuality of analysisClarity of structure & language
    (1/2)
    (1.5/2)
    (1.5/2)
    (1/2)
    (2/2)

    My review :

    A good article in which you were able to answer most of the questions ably, and you have some notes that I made.

    • A good explanation of the CMF indicator.

    • You gave a clear example but it is not correct where you have to provide the results of the previous period 20 to get the result of the period 21.

    The CMF indicator has the default period of observation as 20 or 21 which is best for me because this will help to give the best buying and selling spots in the market.

    • Chaikins suggests 21 days as the default setting. That corresponds approximately to a trading month. If the number of periods is larger, the indicator is less volatile and less prone to sideways movements. In a weekly or monthly chart, the number of periods should be reduced.

    • You did not go into depth in answering the second question.

    Thanks again for your effort, and we look forward to reading your next work.
    Sincerely,@kouba01

    Coin Marketplace

    STEEM 0.68
    TRX 0.10
    JST 0.075
    BTC 57155.56
    ETH 4437.90
    BNB 617.95
    SBD 7.01