What is the Chaikin Money Flow indicator?

The Chaikin Money Flow (CMF) technical indicator is an indicator developed by Marc Chaikin, a stockbroker in 1966. The idea of Chaikin Money Flow is to combine price and trading volume to represent cash flow (in or out of the market) in a certain period. The default CMF period is 21 days.

Chaikin Money Flow Indicator - How to analyze it

Chaikin Money Flow indicator's analysis is based on the theory that general market strength is often accompanied by prices closing in the upper half of the daily high / low range as trading volume increases. Similarly, market weakness is often paired with prices closing in the lower half of the range when volume declines.

Therefore, if the price continually closes at the upper half of the daily range along with increased trading volume, the CMF will be positive, indicating that the market is strong. Conversely, if the price continually closes at the lower half of the daily range as the volume increases, the CMF will be negative, the market is weakening. See the picture below, you will see more clearly, strong or weak market areas are colored:

Chaikin Money Flow Indicator - Apply to trading

  • CMF is above zero - bull signal - an indicator that indicates buying pressure - accumulation phase;
  • CMF is below zero - bear signal - an indicator that indicates selling pressure - distribution period;

Therefore, you will place buy orders when CMF is above 0, and sell when CMF is below zero.

  • Observing the pre-trade indicator values can show you how long the buying/selling pressure has persisted and how persistent they are. For example, prolonged selling (distributing) pressure suggests that the sentiment might remain below zero for the day;
  • Another way to analyze CMF is to look at its intensity. High intensity is stronger. For example, CMF above 0.10 is enough to confirm a bull signal, CMF above 0.25 is a very strong signal of buying pressure;
  • CMF indicator provides a signal to confirm breakout at very good support/resistance levels, especially at trend lines. For example, if the price breaks an upward trendline, to confirm the CMF will cut the 0 lines downward, indicating that the market is ready to sell. Please note that CMF is a lagging indicator so it will take some time to give a signal, not very suitable for fiery Traders.
  • The divergence between price and Chaikin Money Flow will give early signals of a trend of weakness. When the price hits a new high and the CMF cannot create a bearish divergence when selling pressure begins to form; Reversal may occur. This signal is quite similar to the MACD indicator.


Chaikin Money Flow Indicator - Calculated

sum ((((C-L) - (H-C)) / (H-L)) * V) / sum (V)

Inside:
  • C - closing price;
  • L - low price;
  • H - high price;
  • V - volume (21 cycles)
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