Understanding the CMF and MFI Momentum Indicators

Understanding the CMF and MFI Momentum Indicators CMF and MFI momentum indicators are important for making informed stock trading decisions, but different indicators have different underlying formulas

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Success in conventional or online stock trading comes with the use of smart tools.

Markets can be unpredictable and stock movements hard to understand. It is easy to get overwhelmed by the sheer amount of information that is circulating. The last thing you want to do in trading is take a shot in the dark, without fully realizing the need for making such a move or the consequences of it.

Among the most important tools you need to use in stock trading are indexes and indicators. These are vital tools to help you make more informed trading decisions by giving you a technical picture of the stocks and their positions.

Active traders need to monitor the momentum in which money flows. Investopedia analyst Casey Murphy sheds light on tools such as the Money Flow Index (MFI) and the Chaikin Money Flow (CMF) oscillator that can come in handy. So let’s look at these momentum indicators in depth.

Chaikin Money Flow Chaikin Money Flow makes use of two exponentially weighted moving averages that are different for analyzing momentum. The indicator makes use of a 3-day EMA (exponentially-weighted

moving

average)

and

10-day

EMA

of

the

accumulation/distribution line and analyzes the difference between them.

The chart below, by StockCharts.com and included in the Investopedia article, shows the momentum or money flow of Amazon ($AMZN).Here there are two red rectangles, with the negative money flow revealed by the period between these rectangles.

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Here, it indicates a downward directional bias. The areas marked green indicate positive money flow, which reveals an upward trend.

The Money Flow Index Moving to the Money Flow Index, it is significantly different to the Chaikin oscillator. The MFI makes use of volume combined with the latest price movements for determining whether the momentum is rising or falling. This indicator is viewed as a volume-weight RSI (Relative Strength Index). The RSI is also a momentum indicator that analyzes overbought or oversold situations by measuring the scale of recent changes in price.

The above chart by StockCharts.com mentioned in Investopedia reveals the Money Flow Index of Amazon. We see the index firmly locked in the major overbought or oversold levels, not moving above or below them. That observation is similar to what we found in the earlier CMF chart. But with the MFI, the buy and sell signals only get generated with the index moving beyond the levels of 20 or 80. As a result of the underlying indicators being different from those of the Chaikin money flow, the signals for buy and sell appear to be quite different.

It is therefore clear after examining both the indexes that you need to fully understand what the basic formula behind a technical indicator is before you use it for generating signals for buy and sell.

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