Using Chaikin Money Flow (CMF) For Stock Trading

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The Difference Between Chaikin Money Flow and Money Flow Index?

The similarities between the Chaikin money flow (CMF) oscillator and the money flow index (MFI) end with the idea that they are both commonly used by active traders to monitor the flow of money and/or momentum. Yes, while both are commonly used momentum indicators on stock charts, the math underlying each indicator—and how traders interpret signals—is quite different.

Chaikin Money Flow Oscillator

Created by Mark Chaikin, the Chaikin money flow oscillator is similar to the more widely used Moving Average Convergence Divergence (MACD) indicator because it uses two different exponentially weighted moving averages (EMAs) to analyze momentum. MACD is generally calculated by subtracting the 26-period EMA from the 12-period EMA.

Key Takeaways

  • Chaikin money flow oscillator and money flow index are both momentum indicators, but the similarities end there because the ways the indicators are calculated and interpreted are different.
  • Chaikin is similar to MACD in that both indicators use exponential moving averages in their calculations.
  • When the Chaikin money flow indicator is red, it suggests the market is in a downtrend and when it is green, the indicator suggests an uptrend.
  • Money flow index uses volume in combination with recent price movements to determine trends and to determine whether a market is overbought or oversold.

In the case of the Chaikin Money Flow, the indicator uses the difference between a 3-day exponentially-weighted moving average of the accumulation/distribution line and the 10-Day EMA of the accumulation/distribution line. Meanwhile, the accumulation/distribution line (also developed by Chaikin) is a separate indicator that attempts to quantify the amount of money coming in (volume) and its impact on stock prices.

As you can see from the chart of Amazon.com Inc (AMZN) above, negative money flow (as shown by the period between the two red rectangles) suggests that the directional bias is downward. Positive money flow is marked by the green areas on the Chaikin money flow indicator and suggests that the trend is upward. If the indicator rises above .20 or falls below -.20, it could suggest that the market is overbought or oversold.

Money Flow Index

The money flow index is quite different than the Chaiken money flow oscillator because it uses volume in combination with recent price movements to determine whether momentum is up or down. Many traders view this indicator as a volume-weight relative strength index (RSI), which is calculated using average price gains and losses over a period of time (usually 14 days).

Typically, if MFI rises above 80, the market is overbought, and due for a pullback. On the other hand, readings of 20 or less suggest an oversold market that may bounce. As you can see from the chart above, money flow index never moves above or below key overbought or oversold levels on the chart of AMZN as it did in the CMF example. When using the money flow index, buy and sell signals are only generated when the index moves beyond the 20 or 80 levels.

Since Chaikin oscillator and money flow index are calculated using different elements, it is unsurprising to see that the trading signals are quite different. In general, understanding the underlying formula of any technical indicator is essential before using it to generate buy and sell signals.

Chaikin Money Flow (CMF)

Description

Chaikin Money Flow (CMF) developed by Marc Chaikin is a volume-weighted average of accumulation and distribution over a specified period. The standard CMF period is 21 days. The principle behind the Chaikin Money Flow is the nearer the closing price is to the high, the more accumulation has taken place. Conversely, the nearer the closing price is to the low, the more distribution has taken place. If the price action consistently closes above the bar’s midpoint on increasing volume, the Chaikin Money Flow will be positive. Conversely, if the price action consistently closes below the bar’s midpoint on increasing volume, the Chaikin Money Flow will be a negative value.

How this indicator works

  • A CMF value above the zero line is a sign of strength in the market, and a value below the zero line is a sign of weakness in the market.
  • Wait for the CMF to confirm the breakout direction of price action through trend lines or through support and resistance lines. For example, if a price breaks upward through resistance, wait for the CMF to have a positive value to confirm the breakout direction.
  • A CMF sell signal occurs when price action develops a higher high into overbought zones, with the CMF diverging with a lower high and beginning to fall.
  • A CMF buy signal occurs when price action develops a lower low into oversold zones, with the CMF diverging with a higher low and beginning to rise.

Calculation

CMF = n-day Sum of [(((C – L) – (H – C)) / (H – L)) x Vol] / n-day Sum of Vol

Where:
n = number of periods, typically 21
H = high
L = low
C = close
Vol = volume

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The MFI is a momentum indicator that measures the flow of money into and out of a security over a specified period of time.

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

Chaikin Money Flow (CMF)

Contents

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.

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.

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.

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 synch.

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.

  1. Navigate to https://www.tradingview.com/
  2. On the landing page, enter a symbol and click “Launch Chart”
  3. Within the Toolbar along the top of the chart select “Indicators” and choose the one you would like to add to your chart.
  4. To make changes to your Indicator you will need to access the Formatting Window.
  5. You can access the Formatting Window by either clicking on the Blue “Format” button in the Chart Header next to the Indicator name, or by right clicking on the Indicator in the chart itself and selecting “Format”.

INPUTS

Length

The time period to be used in calculating Chaikin Money Flow.

STYLE

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).

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.

PROPERTIES

Last Value on Price Scale

Toggles the visibility of the Indicator Value on the vertical axis.

Arguments in Header

Toggles the visibility of the indicator’s name and settings in the upper left hand corner of the chart.

Scaling

Scales the indicator to either the Right or to the Left.

Using Chaikin Money Flow (CMF) For Stock Trading

Chaikin Money Flow was developed by Marc Chaikin and is a primary used a confirmation tool for trend trading in stocks. It combines both price action and volume into one indicator, as the founder believes that volume leads price.

CMF moves above and below zero based on whether, on average, the stock is finishing in the upper portion of the daily range or the lower portion respectively. Each day is multiplied by volume, so a down day accompanied by big volume will result in a lower indicator reading than a down day on small volume.

While the indicator is typically used on daily charts, it can also be used on intraday charts where volume data is present. A 21-period indicator is commonly used, because it represents approximately 1 month worth of trading days. Multiples of this number are also used, such as 42, 63, 84, 126 or 252. For short-term trading a fewer number of periods will be favorable since the indicator will react quicker to trend changes. Longer-term traders will prefer a longer period CMF indicator.

One of the main ways to use Chaikin Money Flow is to confirm breakouts.

Isolate a resistance/support area where the price has had trouble getting above/below it on a number of attempts. Mark these areas as resistance or support.

When the price rallies through resistance, look for the CMF to confirm the breakout. CMF should be above zero. If it isn’t, it warns the breakout could likely fail.

When the price falls through support, look for the CMF to be below zero to confirm the breakout. If the price breaks support but the CMF isn’t below zero, the breakout is likely to fail.

Figure 1 shows an example on a daily stock chart. The price was hitting resistance just below $37, which it couldn’t get above on multiple attempts. Then, in October, first the CMF turned positive and then the price broke above resistance. Since the CMF was still positive it confirmed the breakout.

For those looking to go long (buy calls), the CMF could have helped solidify that decision.

Figure 2 below shows how the indicator confirmed a downside breakout.

The stock had found support on a number of attempts just above $55. The CMF turned and stayed below zero even while the price rallied a bit, before eventually gapping below support. The negative CMF reading showed the uptrend was weak, and confirmed the downside breakout. That the CMF stayed below zero following the breakout also helped confirm the new downtrend.

For traders looking to go short the CMF would have given them confidence in their decision.

Final Word

The Chainkin Money Flow is a tool that uses both price and volume to confirm the trend or warn of weakness. It isn’t usually used to provide trade signals itself, rather it simply helps to confirm signals using other strategies, such as breakouts or trend trades. For long trades the CMF should be above zero, and for short trades the CMF should be below zero. This shows that momentum (price) and power (volume) are both moving in the same direction as the trade.

No indicator is perfect though. Always manage position size so that a single losing trade doesn’t significantly draw down your account

Chaikin Money Flow

Table of Contents

Chaikin Money Flow

Introduction

Developed by Marc Chaikin, Chaikin Money Flow measures the amount of Money Flow Volume over a specific period. Money Flow Volume forms the basis for the Accumulation Distribution Line. Instead of a cumulative total, Chaikin Money Flow sums Money Flow Volume for a specific look-back period, typically 20 or 21 days. The resulting indicator fluctuates above/below the zero line just like an oscillator. Chartists weigh the balance of buying or selling pressure with the absolute level of Chaikin Money Flow. Additionally, chartists can look for crosses above or below the zero line to identify changes on money flow.

Calculation

There are four steps to calculating Chaikin Money Flow (CMF). The example below is based on 20 periods. First, calculate the Money Flow Multiplier for each period. Second, multiply this value by the period’s volume to find Money Flow Volume. Third, sum Money Flow Volume for the 20 periods and divide by the 20-period sum of volume.

Each period’s Money Flow Volume depends on the Money Flow Multiplier. This multiplier is positive when the close is in the upper half of the period’s high-low range and negative when the close is in the lower half. The multiplier equals 1 when the close equals the high and -1 when the close equals the low. In this way, the multiplier adjusts the amount of volume that ends up in Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1).

The table above shows some examples using daily data for Research in Motion (RIMM). Notice how the multiplier was near +1 on 5-Jan when the stock closed near its high. The multiplier dipped to -.97 on 18-Jan when the stock closed near its low. The multiplier finished near zero (-.07) when the stock closed near the midpoint of its high-low range on 29-Dec. Click here for a calculation example of Chaikin Money Flow in an Excel Spreadsheet.

Interpretation

Chaikin Money Flow (CMF) is an oscillator that fluctuates between -1 and +1. Rarely, if ever, will the indicator reach these extremes. It would take 20 consecutive closes on the high (low) for 20-day Chaikin Money Flow to reach +1 (-1). Typically, this oscillator fluctuates between -0.50 and +0.50 with 0 as the centerline.

Chaikin Money Flow measures buying and selling pressure for a given period of time. A move into positive territory indicates buying pressure, while a move into negative territory indicates selling pressure. Chartists can use the absolute value of Chaikin Money Flow to confirm or question the price action of the underlying. Positive CMF would confirm an uptrend, but negative CMF would call into question the strength behind an uptrend. The reverse holds true for downtrends.

Buying/Selling Pressure

Chaikin Money Flow can be used to define a general buying or selling bias simply with positive or negative values. The indicator oscillates above/below the zero line. Generally, buying pressure is stronger when the indicator is positive and selling pressure is stronger when the indicator is negative.

While this zero line cross seems simple enough, the reality is much choppier. Chaikin Money Flow sometimes only briefly crosses the zero line with a move that turns the indicator barely positive or negative. There is no follow through and this zero line cross ends up becoming a whipsaw (bad signal). Chartists can filter these signals with buffers by setting the bullish threshold a little above zero (+0.05) and the bearish threshold a little below zero (-0.05). These thresholds will not entirely eliminate bad signals, but can help reduce whipsaws and filter out weaker signals.

The chart above shows Freeport McMoran (FCX) with 20-day Chaikin Money Flow in the indicator window. There were at least 10 crosses of the zero line between February and December 2020. Adding a small buffer greatly reduced the number of bullish and bearish signals. A move above +0.05 was considered bullish, while a move below -0.05 was considered bearish. There were only three signals. While these signals will come a little later, it may be worth it to reduce whipsaw.

The chart for Harley-Davidson (HOG) shows a few good signals and a whipsaw with the May bounce. CMF moved above +0.05 for a few days, but this move failed to hold and the indicator broke back below -0.05 in early June. Whipsaws are going to happen, especially during volatile periods or when the trend flattens. CMF turned bullish in July and stayed bullish the rest of the year. Notice that HOG formed a falling wedge that retraced just over 62% in August, when CMF was still in bull mode. This pullback offered a second chance to partake in the CMF signal.

Chaikin Money Flow is not suited for all securities. The chart above shows P.F. Chang’s (PFCB) with some 18 crosses above +0.05 or below -0.05. Basing CMF signals on these crosses resulted in one whipsaw after another. It is important to analyze the basic price trend and the characteristics of an indicator with a particular security. PFCB exhibits some trend, but price action within this trend is choppy and money flow cannot maintain a positive or negative bias. It would be better to find a different indicator for this stock.

Calculation Quirk

The Money Flow Multiplier in Chaikin Money Flow focuses on the level of the close relative to the high-low range for a given period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Money Flow Multiplier would rise if the close were above the midpoint of the high-low range. The chart below shows Clorox (CLX) with a big gap down and a close near the top of the day’s high-low range. Even though the stock closed sharply lower on high volume, Chaikin Money Flow rose because the Money Flow Multiplier was positive and volume was well above average. Ignoring the change from close-to-close means that Chaikin Money Flow can sometimes disconnect with price.

The opposite can happen when a security gaps up and closes near the low for the day. The chart below shows Travellers (TRV) gapping up and closing over 1% higher on the day. Despite this jump, the close was near the low for the day, which insured a Money Flow Multiplier near -1. As a result, almost all of the day’s volume was counted as negative money flow and the Chaikin Money Flow fell.

Conclusion

Chaikin Money Flow is an oscillator that measures buying and selling pressure over a set period of time. At its most basic, money flow favors the bulls when CMF is positive and the bears when negative. Chartists looking for quicker money flow shifts can look for bullish and bearish divergences. However, relying on CMF has risks. Selling pressure still has the edge in negative territory, even when there is a bullish divergence. This bullish divergence simply shows less selling pressure. It takes a move into positive territory to indicate actual buying pressure. As a money flow oscillator, CMF can be used in conjunction with pure price oscillators, such as MACD or RSI. As with all indicators, Chaikin Money Flow should not be used as a stand-alone indicator. Marc Chaikin also developed the Accumulation Distribution Line and the Chaikin Oscillator.

Using with SharpCharts

Chaikin Money Flow can be set as an indicator above or below the main window. Because it is shown in area format, it is not really suited for placement behind the security’s price plot. Once the indicator is chosen from the dropdown list, the default parameter appears (20). These parameters can be adjusted to increase or decrease sensitivity. Users can click on “advanced options” to add horizontal lines, moving averages or other overlays. Chartists can even plot a second and longer Chaikin Money Flow indicator on top of the other. Periods of overlap show when money flow is strong for two different periods. Click here for a live example.

Suggested Scans

CMF Turns Positive and RSI Moves Above 50

This scan starts with a base of stocks that are averaging at least $10 in price and 100,000 in daily volume over the last 60 days. Accumulation and buying pressure is identified when Chaikin Money Flow moves into positive territory. Price momentum confirms when RSI moves above 50 (the centerline). This scan is meant as a starting point for further analysis and due diligence.

CMF Turns Negative and RSI Moves Below 45

This scan starts with a base of stocks that are averaging at least $10 in price and 100,000 in daily volume over the last 60 days. Distribution and selling pressure are identified when Chaikin Money Flow moves into negative territory. Price momentum confirms when RSI moves below 50 (the centerline). This scan is meant as a starting point for further analysis and due diligence.

For more details on the syntax to use for Chaikin Money Flow scans, please see our Scanning Indicator Reference in the Support Center.

Note: For the purposes of scanning, daily volume data is incomplete during the trading day. When running scans with volume-based indicators like CMF, be sure to base the scan on the “Last Market Close.” Examples of other volume-based indicators include Accumulation/Distribution, On Balance Volume, and the PVO.

Further Study

This book covers it all with explanations that are simple and clear. Murphy covers most the major charts patterns and indicators. A complete chapter is devoted to understanding volume and open interest.

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