Hi again, with Chaiken Money Flow
Developed by Marc Chaikin, Chaikin Money Flow measures the amount of Money Flow Volume over a specific period. Money Flow Volume forms the basis for the Accumulation. Look for sharp increases in volatility prior to market tops and bottoms, followed by low volatility as the market loses interest.
Chaikin Money Flow is a technical indicator used to determine
if a security is under accumulation or distribution
Let’s assume that a rather bullish security has quite a high closing price still within the day’s range and a rising volume and the signal is founded on this.
If a security is now shut with a low closing price inside its day’s range with a high volume this means the stock is weak.
There is pressure to sell once a security has closed during the bottom half of the trading range of a time frame and buying pressure once a security shuts in the top half of the range.
The exact number of the tool’s time frame may be different according to the sensitivity and time constraints of investors.
The very first bear signs come with a Chaikin Money Flow below zero. A stock will be under distribution conditions or remains under pressure to sell if the point is below zero.
The amount of time the Chaikin Money Flow has been below zero is another potential bearish sign. Negative for longer, the higher the possibility for greater pressure to sell or distribution. If the stock stays under zero for a long time then greater downward pressure on the price may emerge as the stock attracts a greater bearish mentality.
The amount of selling pressure is another potential bearish sign.
Generally points at either side of the zero line (below or above 0.10) are too weak to declare a bull or bear position.
Move beyond +0.10 and a bull scenario occurs. Equally, below -0.10 and it becomes a bear state.
Taking this further, above +0.25 will result in strong pressure to buy and below -0.25 will create strong pressure to sell.
The Bottom Line
Chaikin Money Flow’s best quality is that it frequently provides early sights of impending reverses in price. It’s best to confirm this by combining other indicators but as Chaikin Money Flow is an advanced tool, this should provide an advantage over others as you are able to confirm the change of control and deal before them.
But, as with other tools, Chaikin Money Flow can give incorrect signs hence the need for extra independent verification. As it uses a moving average it is frequently a lagging tool so is best used verifying other signs. But as far as indicating early reverses for short term trends it’s one of the best indicators.