Blockchain and Cryptocurrency Advanced - Divergence Between the CMF and The Price Line and False Signals

When using the CMF indicator, the bullish divergence and bearish divergence is very useful and can provide a very valuable trade signals. When it comes to divergences between CMF and price action, it is basically when the CMF and price are moving in opposite direction. This simply means that when the price is moving in one direction and the CMF oscillator is moving in another direction, the bullish or bearish divergence occurs. This divergence can be used as an early signal of a potential trend reversal coming.

Bullish Divergence on CMF

A bullish divergence on the CMF occurs when the price if falling in a downward direction but at the same time the CMF is moving in an upward slope direction. This is an indication that there is a bullish divergence in the market. The bullish divergence on the CMF is an indication that the downward price movement is weak and that there is a slowdown in the downtrend momentum. When the bullish divergence occurs on the CMF, it is a strong indication that the momentum of the buyers is still strong even though the price of the asset has decreased, that buying pressure in the market is high and buyers are now in control of the market.

The Bullish divergence on the CMF can be used as a valuable early signal for a potential upcoming reversal in the market which serves as a good buy entry signal. From the AAVE/USDT chart, we can see the bullish divergence. As price was falling, the CMF was rising in an upward slope, this was a signal of a potential reversal in the market. We can see that after that, the price reversed into a downward movement or downtrend.

AAVE/USDT Chart

Bearish Divergence on CMF

A bearish divergence on the CMF occurs when the price if rising in an upward direction but at the same time the CMF is moving in a downward slope direction. This is an indication that there is a bearish divergence in the market. The bearish divergence on the CMF is an indication that the upward price movement is weak and that there is a slowdown in the uptrend momentum. When the bearish divergence occurs on the CMF, it is a strong indication that the momentum of the sellers is still strong even though the price of the asset has increased, the selling pressure in the market is high and sellers are now in control of the market.

The Bearish divergence on the CMF can be used as a valuable early signal for a potential upcoming reversal in the market which serves as a good sell entry signal. From the AAVE/USDT chart, we can see the bearish divergence. As price was rising, the CMF was falling in an upward slope, this was a signal of a potential reversal in the market. We can see that after that, the price reversed into an upward movement or uptrend.

AAVE/USDT Chart

False Signals on CMF indicator

Yes, the CMF indicator is known to produce false signals. As a volume-based indicator, it is not always reliable and can produce false signals. As always, no single indicator is perfect, which means that there is always limitations and false signals. That is why before taking any buy or sell signal from the CMF indicator, it is important to combine the CMF indicator with other technical indicators or tools like the moving average indicator, RSI, MACD, ichimoku cloud, for signal confirmation and to identify false signals before making any trading decision.

The CMF indicator has proven to be a very powerful indicator for identifying trends in the market. This can become very valuable for trader to identify useful signals when it comes to confirming trends in the market, early trend reversal signals and also for good buy and sell signals. However, as a volume-based indicator, the CMF indicator is not always reliable and can produce false signals. That is why before making use of the signals on the CMF, it is very important to combine the CMF indicator with other technical indicators and tools to confirm the signals before making any trading decisions. The CMF indicator is one of the popular indicators and has proven to be a very powerful indicator utilized by traders spot trading opportunities in the market in order to make profits.