Crypto Academy Season 4 [ Advanced course ] week 6: Crypto Trading With Chaikin Money Flow Indicator

3개월 전

Hello steemit community. week 6 of the crypto academy task

Homework task

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

  2. 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)

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

  4. 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)

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

  6. Conclusion:


    CMF.png
    image designed in canva

all images are gotten from binance unless otherwise stated

1. 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 indicator (CMF) is classified as a accumulation/distribution kind of technical indicator. It was brought to existence by Marc Chaikin,, a trader n the 1980's-. The Chaikin Money Flow (CMF) indicator is used to identify and measure buying and selling prices in the market of an instrument/asset, this it does by employing the basic accumulation/distribution theory used in the creation of the indicator.

By comparison of the close price to the high-low range of an asset or instrument, the Chaikin Money Flow Indicator is able to measure and determine if the asset/instrument is under accumulation or distribution.
The Chaikin Money Flow (CMF) indicator increases in value when the close of an asset is near the sessions high with increased volume and conversely, it decreases in value when the close of an asset is near the sessions low with increased volume.

The Chaikin Money Flow indicator is displayed using a moving line with numbers ranging from 1 to -1 but the indicator usually stays between the 0.5 and -0.5 levels and in rare cases reaches the maximum values of 1 and -1.

How to calculate the value of the chaikin money flow indicator
To calculate the value of the ChaikinMoney Flow indicator, there are three breakdowns to follow.
First, we determine the money flow multiplier, this is because the volume of the money flow depends greatly on the multiplier which can take either a positive or negative value.
Money Flow Multiplier
To calculate the Money Flow multiplier we find the difference between the closing and opening price of the asset, subtract from the difference between the highest price and close price of the asset and finally divide by the difference between the highest and lowest price. The calculation is further simplified as

Money flow multiplier = [(Close price - Low price) - (High price - Close price)] / (High - Low)

Next, we calculate the volume of cash flow
This is done by multiplying the Money flow multiplier by the volume for the period

Finally, the chaikin money flow value is calculated as

Volume of cash flow/ sum of volume for the period


eh.png
image gotten from binance

In the ADA/USDT chart above, we can get relevant data to calculate the cmf value.

  • Highest price -$2.243
  • Closing price - $2.220
  • Lowest price - $2.145

Assuming volume data is as follows

  • Volume of the period - $10,000,000
  • Sum of volume for the period - $15,000,000

The Chaikin Money Flow is calculated as:
calculating money flow multiplier
[(2.220-2.145) -(2.243-2.220)] / (2.243-2.145) = 0.075 - 0.023 / 0.098
=0.531

Volume of cash flow = 0.531 x 10,000,000
=5,310,000

Chaikin Money Flow value = 5,310,000 / 15,000,000
= 0.354


image.png

2. 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)

For this demonstration, ill be making use of the Binance platform

How to add CMF indicator to chart
On the binance web, open a chart pair of your choice.

  • Select the technical indicator options

    Screenshot_20211015_233331.png
  • Search "Chaikin Money Flow" and select it.

    Screenshot_20211015_233518.png

    The indicator would be applied to chart.

    Screenshot_20211015_233601.png

    Modifying the settings of the period
    To modify the settings of the CMF indicator, click the settings icon nested in the indicator panel as shown in the image below.

    Screenshot_20211015_235656.png


    Customization of the period settings

    Screenshot_20211016_051556.png

To modify the settings of the period, navigate to the input tab in the settings menu.

The default period setup of the Chaikin Money Flow indicator is 20/21 periods, this setting means that the CMF indicator will move based on data gotten from.the last 20 or 21 candles. this can easily be customized to suit a traders' style and preference.

When picking a setting for the CMF indicator, it's important to note that length values over 30 in general tend to be less sensitive to market movements and this results in fewer but more accurate signals.
On the other hand CMF length values below 30 tend to be over sensitive to market movements and will give off more signals with respect to noise in the market.

The default period is optimal for traders who trade over shorter periods of time (short-term traders). However, In picking the best settings for a long term trader, values over 30 will give more accurate signals. Therefore in picking the best length settings, it's important to take into consideration the kind of trader one is.


image.png

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


The Chaikin Money Flow indicator is used by traders for confirming the existing trend in a market structure.

Firstly in confirming a trend, a rule of thumb to note when using the Chaikin Money Flow (CMF) indicator is that;

CMF values above 0 indicate bullish momentum (uptrend)
CMF values below 0, indicator bearish momentum (downtrend).

Therefore, in a market structure with an existing uptrend, if the Chaikin Money Flow indicator remains in the positive zone then the uptrend is confirmed however if the Chaikin Money Flow descends to the negative zone in an uptrend market then this signals that the trend in the market is about to change. In this case to a downtrend.

Similarly, in market structure exhibiting downtrend movement, the trend will be confirmed if the Chaikin Money Flow indicator remains in the Negative zone. However in a similar scenario as explained above, when the market is in a downtrend and the Chaikin Money Flow is in the positive zone then this might signal a reversal in the existing market trend.

In determining entry and exit points, the following trade criteria should be followed.

buy when the CMF line crosses the center line (0) from below
Sell when the CMF line crosses the center line (0) from above.

To get more accurate signals, its advisable to trade with the trend.


new.png
cmf usage in trend direction confirmation (ADA/USDT 4H timeframe)

In the ADA/USDT chart above we have used our trade entry criteria in play. We observe the cmf line made a few crosses from the middle zone. The first cross marked was from the middle to the top and after that, there was a momentary increase in the market till the cmf made a cross from the centerline to the downside and again there was a decrease in price when cmf line remained below the centerline and lastly, another cross was made from the centerline to the upside and the ADA pair has been in an uptrend since then.



image.png

4. 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)


As illustrated by the crypto professor, we can also choose to trade using wider lines which would help to pinpoint entry positions on a pair.
We can choose to configure the +/-0.1, +/-0.15 or +/-0.2 signal crossing lines to indicator.

I'll be making use of the +/-0.1 signal crossing for this analysis with the trade criteria given below.

  • Take a buy entry when indicator crosses the 0.1 crossover line and take profit when it hits -0.1
  • Take a sell entry when cmf line crosses the -0.1 line from above and take profit when it crosses above the 0.1 crossover line.

Buy trade AAVE/USDT


buy.png
Buy entry using the +/- 0.1 crossover line on the CMF indicator (AAVE/USD Chart)

In the chart above, I've added the crossover lines at 0.1 and -0.1 respectively. In this trade I've utilized the support level in conjunction with the trade taken. We observe price pulled down to the support level and the cmf line crossed the 0.1 line from below giving off a buy signal. After this market movement, the AAVE price continued to increase and profit was taken when the cmf line crossed below to 0.1.

Sell trade


sell.png
Sell entry using the +/- 0.1 crossover line on the CMF indicator (AAVE/USD Chart)


In the chart above, the +/-0.1 crossover lines have also been added to chart. The cmf line keeps moving downwards until the -0.1 crossover line is breached, this is a sell entry confirmation. We observe the trade played out beautifully as price continued to decline and finally profit was booked when the cmf line triggered the +0.1 line above.


image.png

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


Trading divergence with CMF
Divergence occurs when

Whenever a divergence is spotted, it means a potential trend reversal is on the rise.

Bullish divergence


hey.png
Bullish Divergence (AVAX/USD 15 minute timeframe)

Bullish divergence occurs when the price of an asset continues to make lows but the Chaikin Money Flow on the other hand reports highs.

This often indicates that selling pressure is decreasing and buyers are about to take over. This played out well in the AVAX chart pair above, price continued to make lower lows over a period but the cmf indicator continued to report higher highs and finally the market trend reversed from its bearish trend to a bullish one.

Bearish divergence

Bearish divergence occurs when price movement reports a bullish trend but the cmf indicator on the other hand gives off bearish signals

bear.png
Bearish Divergence (DOGE/USD 4 hour timeframe)

This often indicates that the buying pressure is decreasing and sellers are about to take over. This played out well in the DOGE chart above where price reversed from a strong bullish movement to a bearish one.

Does this trading strategy produce false signals

The CMF divergence trading strategy as effective as it may seem also gives off false signals. This is because the cmf indicator isn't meant to be used as a standalone indicator. An example of a false signal given off when using this strategy is indicated in the NEAR/USFT chart below


fake.png

In the chart above, price kept making higher highs but the cmf indicator on the other hand made lower lows. An unsuspecting trader would take this to be a reversal signal in the form of a bearish divergence but further observation of price shows that price keeps making higher highs therefore the divergence signal is invalidated.

From the example given above, we can therefore note that the cmf indicator shouldn't be used alone, instead it should be paired with other confirmation indicators like the moving average convergent-divergent (MACD). The length period of the cmf indicator can also be increased to get fewer but more accurate signals

Conclusion


Concerning the questions assigned by professor @kouba01 and in adherence to the respective rules highlighted. I've done my research and tried to tackle the advanced course for the week. I was able to learn new things through the course of this task. I'd leave the assessment to the professors.
Thanks to the steemit team for this wonderful learning opportunity once again. It's been nice so far, I'm forever grateful.

I apologise if there are any msistakes noticeable in the course of making this post, I'd appreciate if the professor could point that out for me.
Thanks for curating my content :)

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Hello @doppley,
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|6/10 rating, according to the following scale:

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

My review :

Work with acceptable content. It was possible to go deeper into the ideas presented and provide several examples. Here are some notes that I bring to you.

  • You did not provide a clear example of how to calculate the value of CMF.

  • You did not interpet how to choose the appropriate settings for the periods.

  • You did not go into depth in answering the second question, as you did not explain how to determine the entry and exit points.

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

·

Thanks a lot professor for your review.
I always have issues with the period settings question, I've run out of information to write. I'll do a better analysis next time
Thanks again