Technical Analysis

Setting Up a Long Term Example

Long Term Look at EUR/YEN 2004-mid 2006: Setting Up The Comprehensive Example

The analysis in this section focuses on a long term look of the EUR/JPY pair. Therefore, we will be examining daily charts throughout the example. The point of this exercise is to get a feel for how the Chaikin Money Flow indicator works, and the kind of information and signals it can give. The signals in this analysis come slowly, and therefore are better suited for a long term trader. Since the time horizon for the trades in this comprehensive example are anywhere from a week to a month, the strategy and analysis presented would apply most to those that considers themselves position traders.

The analysis will try to:

• Study the effects of accumulation and distribution on subsequent price movements through observation of the CMF indicator.
• Use CMF to recognize trade setups that could have been profitable.
• Look for signs showing clear tradable trends, and any changes or reversals to those trends.

Of course, carrying out profitable trades using any technical analysis indicator or tool is much easier when they are considered after the fact. During an actual live trade, CMF should be used in conjunction with other indicators in order to get more informed signals.

Indicator Uses and Strategy

CMF's value is in confirming leading indicators or trendline breaks, and in seeing when trends may be changing as traders start either accumulating or distributing a certain pair.

Throughout this example Accumulation will mean traders buying the EUR/JPY pair. Euro bulls are buying Euros or Yen bears are selling Yen. Distribution implies that Euro bears overwhelmed Euro bulls and are now selling the EUR/JPY pair. Selling the EUR/JPY pair is equivalent to "buying" Yen and therefore, during distribution, Yen bulls overwhelm their Yen bear counterparts.

• If we notice a new trend towards accumulation we will buy Euros (buy/long the EUR/JPY pair). The signal for such a change will be a reversal of a downward CMF trend. The new upward trend will start as a trough in CMF. As long as CMF is accumulating, it will head upwards from a negative measure, cross the zero line, move above the +.10 level, and then continue towards +.25. CMF may reach even higher than +.25 before the smart money starts selling the pair.
• If we notice distribution we will buy Yen (sell/short the EUR/JPY pair). The signal for a new downward trend will be a reversal to a CMF accumulation trend - a peak of the CMF indicator. Distribution starts when CMF drops from +.25 to +.10 to the zero line, and falls further to -.10 and -.25.

The analysis will begin in earnest on the following page with April. Before we start on April's signals, we should first take a quick look at March.

1. During March, the EUR/JPY pair dropped sharply from a high of 138.50 to a low of 126.50. CMF indicates that money is flowing into the Yen - the telltale sign of distribution of the pair.
   
2. When price reaches March’s peak, CMF is equivalent to +.10. When price creates the new low CMF measures -.25.
   
3. From this rather significant point of distribution price’s trend changes.

Let’s see how we can use the CMF indicator to show us the inclination of traders and see if it would have been possible to benefit from its signals.

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