Chaikin Money Flow (CMF)
Definition
Chaikin Money Flow (CMF) is a technical analysis indicator used to measure Money Flow Volume over a set period of time. Money Flow Volume (a concept also created by Marc Chaikin) is a metric used to measure the buying and selling pressure of a security for single period. CMF then sums Money Flow Volume over a user defined look-back period. Any look-back period can be used however the most popular settings would be 20 or 21 days. Chaikin Money Flow's Value fluctuates between 1 and -1. CMF can be used as a way to further quantify changes in buying and selling pressure and can help to anticipate future changes and therefore trading opportunities.
History
Chaikin Money Flow was created by famed stock analyst Marc Chaikin. The Chaikin Money Flow has become closely related to two of Chaikin’s other famous indicators; the Chaikin Oscillator and Accumulation/Distribution.
Calculation
The calculation for Chaikin Money Flow (CMF) has three distinct steps (for this example we will use a 21 Period CMF):
1. Find the Money Flow Multiplier
[(Close - Low) - (High - Close)] /(High - Low) = Money Flow Multiplier2. Calculate Money Flow Volume
Money Flow Multiplier x Volume for the Period = Money Flow Volume3. Calculate The CMF
21 Period Sum of Money Flow Volume / 21 Period Sum of Volume = 21 Period CMFThe basics
Chaikin believed that buying and selling pressures could be determined by where a period closes in relation to its high/low range. If the period closes in the upper half of the range, then buying pressure is higher and if the period closes in the lower half of the range, then selling pressure is higher. This is what the Money Flow Multiplier determines (step 1 in the calculation above). The Money Flow Multiplier is what determines The Money Flow Volume and therefore, ultimately Chaikin Money Flow (CMF).
Chaikin's Money Flow's value fluctuates between 1 and -1. The basic interpretation is:
- When CMF is closer to 1, buying pressure is higher.
- When CMF is closer to -1, selling pressure is higher.
What to look for
Trend Confirmation
Buying and Selling Pressure can be a good way to confirm an ongoing trend. This can give the trader an added level of confidence that the current trend is likely to continue.
During a Bullish Trend, continuous Buying Pressure (Chaikin Money Flow values above 0) can indicate that prices will continue to rise.
During a Bearish Trend, continuous Selling Pressure (Chaikin Money Flow values below 0) can indicate that prices will continue to fall.
Crosses
When Chaikin Money Flow crosses the Zero Line, this can be an indication that there is an impending trend reversal.
Bullish Crosses occur when Chaikin Money Flow crosses from below the Zero Line to above the Zero Line. Price then rises.
Bearish Crosses occur when Chaikin Money Flow crosses from above the Zero Line to below the Zero Line. Price then falls.
It should be noted that brief crosses can occur resulting in false signals. The best way to avoid these false signals is by examining past performance for the particular security that is being analyzed and even adjusting the thresholds accordingly. For example, instead of a Zero Line Cross, a technical analyst may use two separate lines such as .05 and -.05.
Unreliability
Chaikin Money Flow does have a shortfall in its calculation. The shortfall is that the Money Flow Multiplier, which plays into determining Money Flow Volume and therefore Chaikin Money Flow values, does not take into account the change in trading range between periods. This means that if there is any type of gap in price, it won’t be picked up on and therefore Chaikin Money Flow and price will become out of sync.
Summary
Chaikin Money flow is a nice indictor that gives the technical analyst another view of Chaikin's theories about buying and selling pressure. It should not necessarily be used by itself as a stand-alone signal generating indicator. CMF works well when in conjunction with additional indicators, especially those indicators that were also generated by Chaikin; Accumulation/Distribution (ADL) and The Chaikin Oscillator.
Inputs
Length
The time period to be used in calculating Chaikin Money Flow.
Style
MF
Can toggle the visibility of the Money Flow Line as well as the visibility of a price line showing the actual current value of Money Flow. Can also select the Money Flow Line's color, line thickness and visual type (Line is the default).
Zero
Can toggle the visibility of the Zero Line. Can also select the Zero Line's value, color, line thickness and visual type (Dashes are the default).
Precision
Sets the number of decimal places to be left on the indicator's value before rounding up. The higher this number, the more decimal points will be on the indicator's value.