The Chaikin Money Flow indicator is an oscillator that analyzes the volumes and the price to discover accumulation-distribution.
It’s created by Marc Chaikin to tracks the money and identifies buying or selling momentum.
The standard period is 21 periods, many traders use it on weekly charts.
Generally, this oscillator fluctuates between -0.50 and +0.50. The maximum values are +1 and -1.
The indicator increases when the money flows into the market and vice-versa. Generally, an up-trend is strong if the Chaikin Money Flow increases. Buying pressure pushes the indicator above zero.
Why does it work? Because only the buyer could sustain the price. When volumes decrease, the Uptrend is troubling.
In the same way, in a Downtrend, the indicator has to decrease to confirm the direction.
The Formula: ( ( (Close – Low) – (High-Close) ) / (High-Low) ) x Volume
This is a chart with the original indicator for TradeStation:
How to use the Chaikin Money Flow
When the prices break an upward trendline and the Chaikin Money Flow crosses the zero line from above, you can trade the breakout.
When prices move higher and the indicator goes lower there is a divergence. It’s indicating a possible trend reversal.
Crosses the zero-line
We don’t like to trade the indicator itself. So, we don’t care about the crosses signal.
Our custom indicator
We modified the standard indicator. Firstly, we add two moving averages (7 and 21 periods) to determine the trend direction.
Moreover, we use the Slope Moving Average to determine the change in direction. You have to “slope” the Chaikin Money Flow to determine if it’s increasing or decreasing.
We could filter the reversal by setting the cross signal a little above zero and a little below zero.
We don’t create a strategy because Chaikin Money Flow should not be used as an entry-signal indicator.
It’s important that you don’t use this indicator in short timeframes because the noise is too high.
This is the code of our Custom SHOWME Indicator for TradeStation and MultiCharts