What is the Chaikin Money Flow (CMF)?
The Chaikin Money Flow (CMF) is an indicator created by Marc Chaikin in the 1980s to monitor the accumulation and distribution of a stock over a specified period. The default CMF period is 21 days. The indicator readings range between +1 and -1. Any crosses above or below 0 can be used to identify changes in money flow, as well as buying or selling momentum.
Buying pressure leads to positive readings, above zero. Sustained selling of a stock pushes the indicator below zero. When CMF oscillates right around the zero line, this indicates relatively equal buying and selling pressure, and no clear trend. Traders use the CMF system as a tool for identifying and assessing the trends of stocks being traded.
Calculating Chaikin Money Flow
The value of Chaikin Money Flow is calculated in the following three steps:
1. Money flow multiplier
The first step is to determine each period’s money flow multiplier as follows:
Money Flow Multiplier = ((Close value – Low value) – (High value – Close value)) / (High value – Low value)
2. Money flow volume
The next step is to calculate the volume of money flow by multiplying the volume for the period by the money flow multiplier obtained in step one. It is usually calculated on a daily basis but can be figured otherwise, such as hourly or weekly.
Money Flow Volume = Money Flow Multiplier x Volume for the Period
The last step is to calculate the CMF value. Simply divide the daily money flow over a certain period of time by the sum of volume for the same period. The default number of periods for CMF is 21 days, as this represents the trading over the past month. (There are typically 21 or 22 trading days in each month.) The formula is as follows:
CMF = 21-day Average of the Daily Money Flow / 21-day Average of the Volume
Most trading software and charting platforms include the Chaikin Money Flow indicator, so you don’t have to do the calculations yourself. Some platforms express the indicator as a decimal by dividing it by 100, while other platforms indicate it as a value between 0 and 100. A value of 0.45 on one trading platform and 45 on another platform mean the same thing.
Since the Chaikin Money Flow indicator is an oscillator, it is often represented on a chart as a histogram, similar to the MACD.
Trading with the CMF (What to Look Out for)
Here are some of the signals that traders can observe when trading with the Chaikin Money Flow:
Traders can draw trend lines on the indicator and spot possible breakouts on the chart. A trader must accurately identify a trend since it gives them confidence during trading that the trend will most likely continue.
For example, when there is a continuous buying period (when the CMF value is sustained above zero), the trend is considered bullish and indicates that price will continue to rise with the trend. When there is continuous selling pressure (CMF value below zero), this points to a bearish trend, indicating price will continue downward.
Higher readings, either positive or negative, indicate a stronger trend. Increasing readings indicate gaining momentum.
Crosses can be observed on the chart when the Chaikin Money Flow intersects the zero line either from above or below. The crosses may be an indication of a possible trend reversal.
Crosses may be bullish or bearish. Bullish crosses occur when the CMF crosses the zero line from below, and stock prices continue on an upward trend. Bearish crosses occur when the CMF crosses the zero line from above, and prices continue to fall.
Sometimes, false signals may occur when the crosses are only temporary – just barely crossing the zero line and then crossing back. To minimize false trading signals, some traders wait until the indicator moves more than 5 points past the zero line before entering a trade. (That is, until there is reading higher than +.05 or lower than -0.5.) Traders can also combine the CMF indicator with other technical indicators to obtain confirming trade signals.
Divergence occurs when price action lacks a corresponding change in the CMF indicator. Bearish divergence is when price moves to a new high but the CMF reading does not go higher. This is interpreted as indicating a possible impending trend reversal to the downside. Bullish divergence indicates a possible upside reversal is coming. This occurs when price falls to a new low but the Chaikin Money Flow does not follow suit with a lower reading.
When there is strong trend momentum, a new high price will be reflected in a corresponding new high reading on the CMF.
Shortcomings of Chaikin Money Flow
The Chaikin Money Flow indicator is predominantly used as a tool to help gauge the strength of a trend. It is not a trading system designed to provide stop-loss points or pinpoint entry and exit prices. Therefore, traders typically use it in combination with other technical indicators that can provide further information.
Thank you for reading CFI’s explanation of the Chaikin Money Flow indicator. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: