Chaikin Money Flow: An Early Signal?

Could it be that the Chaikin Money Flow may be one of those rare technical indicators that provide a signal before a change in trend? Unfortunately, the Chaikin Money Flow usually appears to be a lagging indicator if you are looking for buy signals, but when you see it turning down in an uptrend it is often time to pay attention and tighten your stops as the Chaikin Money Flow is good at anticipating stock market declines in advance.

Your average technical indicator is based on nothing more than price movements which, considering the huge array of information and research available about the market, does not give you much of a competitive edge. The Chaikin Money Flow at least goes one step further by considering the volume associated with those price movements.

The Chaikin Money Flow indicator was developed by Marc Chaikin a professional trader who based the indicator on his premise that stocks were either in an accumulation mode or a distribution mode but that these phases weren't detectable from a purely price-based chart.

Chaikin had three criteria for the Chaikin Money Flow Indicator. Firstly, if a stock or market closes above its midpoint for the day, then it is in accumulation for that day and vice versa. The second, is that healthy advances should be accompanied by strong accumulation. The third premise is that by using the Chaikin Money Flow you can measure the flow of money into and out of the market.

This idea is extended to several days to get the longer-term trend, which is where Chaikin Money Flow comes in to its own. Chaikin Money Flow is the average of several periods money flow (21 days are often used to compute the shifting average), divided by overall volume for the relevant period.

The ultimate worth of the Chaikin Money Flow is that it often works as an early indicator associated with a coming reversal. This should be confirmed with your other indicators; however when you're dealing with an advanced signal like Chaikin Money Flow, you can stay ahead of the crowd simply by making your exit before the crowd panics.

Although the Chaikin Money Flow is an early indicator, Chaikin Money Flow, like most indicators, will sometimesgenerate an incorrect signal, emphasizing the value of independent verification; it is, however, amongst the best technical signs of earlier reversal within short-term trends.

Divergence of the Chaikin Money Flow oscillator:

A lower top in the Chaikin Money Flow oscillator in opposition to higher heights, a negative divergence, is the primary signal you are looking for.

To get excellent result along with Chaikin Money Flow (CMF) we need to put it to use with other technical indicators

Make use of two or three reliable indicators confirming a signal associated with divergence and this will provide more reliable evidence of a trend change signal.

To see how you can combine sentiment indicators along with traditional indicators such as Chaikin Money Flow to find reliable signals, take a look at our Market Timing strategy here Trading System.