Crypto 101: Gauging Trend Strength With the Chaikin Money Flow

If you ever wanted to quantify the strength of a trend based on its volume levels - as well as the degree of buying and selling pressure - there's a handy indicator that can help you do the job.

The Chaikin Money Flow is an indicator, created by Marc Chaikin, that's used to analyze Money Flow Volume over a specific "Lookback" period of time, usually 20 or 21 days.

The concept of Money Flow Volume is a variable used in the calculations by Chaikin and measures the buying and selling pressure of an asset over a single period.

In order to calculate money flow, one must first determine the Money Flow Multiplier used in the overall equation.

The CMF's value fluctuates between 1 and -1, with the basic interpretation that when the CMF is closer to 1, buying pressure is higher, while, conversely, when below 0 and closer toward -1, selling pressure is higher.

With a triggered sell-off along the $4,000 former support zone, the CMF illustrated a huge pickup in selling pressure and confirming the bearish move as legitimate and extensive.

The CMF is best used in conjunction with other indicators like the relative strength index.

Once the CMF reaches the bottom of the range, selling pressure is at its greatest extent and if no further drawdown is achieved then you may consider prices to be stabilizing at those current levels.

The Chaikin Money Flow faces limitation in the aforementioned Money Flow Multiplier as it does not take into account the change in a trading range between periods, meaning any price gaps on the chart won't be picked up and will fall out of sync until an eventual reset or a reconfiguration of the values.

When combined with other indicators the Chaikin Money Flow can be a useful tool for measuring the buying and selling pressure of a particular asset over a specified timeframe and could save you potential losses in the future when used in conjunction with other noteworthy signals.