The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. This Week its the trun of the Chaikin Money Flow nd Oscillator. (for a free 2-week trial CLICK HERE)
Chaikin Money Flow and Oscillator
Since both Chaikin Money Flow and Oscillator rely on the Accumulation Distribution line discussed in the article published November 29, 2016, it is worth reviewing here. The Accumulation/ Distribution line is designed as a momentum oscillator, and is best used on daily, weekly and monthly stock charts, in conjunction with volume. When there is strong buying pressure with high volume, this pushes the indicator higher and strong selling pressure with reduced volume pushes the indicator lower. The Accumulation/ Distribution line either reaffirms the trend or gives a warning that the trend is about to change direction. As prices continue higher with the Accumulation/ Distribution line pointing lower, this suggests selling pressure (distribution) which could forecast a trend change in the underlying market. When prices trend down, and the A/D line points up, this suggests buying pressure (accumulation) and is a bullish reversal signal for the underlying market.
In the Amazon chart below, there were four strong signals noted within the red boxes when volume spiked. The A/D line showed selling pressure in the first box, bullish divergence in the 2nd, and buying pressure in the 3rd and 4th boxes. Chaikin Money Flow and Oscillator build on the A/D line. Instead of a cumulative total of Money Flow Volume which is what the A/D line is, CMF looks back over 20 periods and divides it by volume for the same number of periods to get an oscillator which fluctuates above and below the zero line.
When the CMF fluctuates above the zero line it indicates buying pressure and below the zero line fluctuation indicates selling pressure. One can compare this value with the absolute level of money flow in the A/D line as shown in the 4-hour Amazon chart below. In a bullish market, the trader can look to buy the stock when the oscillator retreats to the zero line, indicating that price is running out of steam in the near term for consolidation. Looking at the A/D line confirms the uptrend but doesn’t show the nuances that the oscillator shows to make that buying decision.
The Chaikin Oscillator takes the A/D Line and applies both the 3 and the 10-period exponential moving averages to the line, subtracts the 2 EMAs from one another and displays the difference around the zero line in an oscillator. Upon close observation of the chart below, there isn’t much of a difference between these two oscillators. However, the Oscillator is more of a momentum indicator, as it measures the change in momentum of the A/D line. Since changes in momentum often precede a change in trend, traders can use this oscillator to anticipate changes in trend.
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