Chaikin Money Flow Indicator – Essential tutorial || What is? How to use? How to calculate? Download for free our modified indicator with slope.
Developed by Marc Chaikin, the Chaikin Money Flow CMF is a market strength indicator, measuring the amount of money exchanged over a given period.
These indicators form the basis for developing the classic Distribution Accumulation line, while the indicator summarizes the cash flow for a specified period.
The standard period is 21 periods; many traders use it on weekly charts.
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What is Chaikin Money Flow?
It tells us whether investors are accumulating through buying or distributing with selling.
A change in flow movement somewhat anticipates that of prices and thus can help the trader catch the reversals of the trend more quickly.
The indicator oscillates above/below the zero lines, just like most oscillating indicators.
On the graph, you can also look for crosses above or below the zero line to identify changes in cash flow.
Although the CMF Indicator is an oscillator that can vary between 1 and +1, it hardly approaches these values.
It usually fluctuates between -0.50 and +0.50, with the ZERO serving as the centerline.
The volume takes up depends strictly on the Money Flow Multiplier, which is its central hub.
It assumes positive values (cumulative phase) when the closing price is more than half of the daily range.
Assumes negative values when the closing price falls below half of the daily range (presence of a distribution phase).
It will be equal to 1 when the closure matches the maximum and -1 when the closure matches the minimum.
How do you use the Chaikin Volatility Indicator?
As we said at the beginning, this oscillator measures the intensity of pressure that buyers or sellers are exerting.
These pressures (both buying and selling) are then even more intense when associated with high trading volumes.
Let’s see what the classic strategies that use this indicator are
Identification and confirmation of the trend
During the development of an upward trend, the CMF Indicator must:
a) remain above its equilibrium line and
b) rise in line with prices. If the indicator does not follow the positive market trend, downward divergences may arise (with the indicator showing a decrease in buyer strength).
During the development of a downward trend, the CMF Indicator must:
a) remain below its equilibrium line and
b) fall in line with prices. If the indicator does not follow the negative market trend, bullish divergences may arise (with the indicator showing a decrease in the strength of sellers).
Crossings above/below zero line
According to this approach, a positive value of the CMF (thus above zero) confirms the existence of an upward trend and vice versa. The same (on the contrary) applies even if we are in a downtrend. As we said earlier, this signal is all the stronger when associated with high volumes.
This type of strategy is not optimal, and risks generating many false signals.
It is much better to set the bullish threshold just above zero (+0.05) and the bullish limit just below (-0.05).
We don’t like to trade the indicator itself. So, we don’t care about the crosses signal.
When the prices break an upward trendline, and the Chaikin Money Flow crosses the zero line from above, you can trade the breakout.
Like most oscillators, the CMF can also give us beneficial indications through divergences. Suppose that price action shows two peaks in a specific direction (upward or downward).
Suppose also that the CMF chart shows two peaks going in the opposite direction (therefore downward or upward).
In this situation, the current price trend may be weakening, and there may be an imminent reversal.
How is Chaikin Money Flow calculated?
The CMF is a “derived” indicator since Accumulation/Distribution (A/D) is used for its calculation.
In particular, the oscillator measures the difference between the upward pressure, calculated as the difference between the closing price (C) and the minimum price (L), and the downward pressure, calculated as the difference between the maximum price (H) and the closing price (C).
The whole is then weighted for the volumes that occurred during the period (V) and the daily range (H – L).
The formula is as follows:
((( C-L ) – (H-C )) /(H-L )) * V
In more detail, to calculate the Chaikin Money Flow, we must:
- Calculate the multiplier of the Money Flow Multiplier for each period [(Close – Minimum) – (Maximum – Close)] /(Maximum – Minimum)
- Calculate the Money Flow Volume by multiplying the volume of each period by the Money Flow Multiplier
- Add on the one hand the Money Flow Volume of each period and on the other hand the volumes of each period
- Finally, the Sum of Money Flow Volume is divided by the Sum of the total volume of the periods.
The formula, in Metastock format, for calculating the 21-period Chaikin Money Flow, is as follows:
sum(((( C-L ) – (H-C )) /(H-L )) * V,21) / sum(V,21)CMF
Our free Custom Chaikin indicator for TradeStation and MultiCharts
This is our custom indicator coded in EasyLanguage for TradeStation and MultiCharts. You can download it for free.
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 decide whether 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 CMF should not be used as an entry-signal indicator.
You mustn’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.
I would like to know how buying and selling pressure can be identified.
When the indicator moves below zero, we are in the selling pressure area and vice versa above zero.
What is the Money Flow Multiplier and the Money Flow Volume?
Money Flow Multiplier and Money Flow Volume are the variables used in the calculations of the Chaikin oscillator.
Is it identical to the Money Flow Index indicator?
No, the Money Flow Index, also commonly called MFI, is an oscillator that uses both the price and the volume to measure the buying pressure, but also the selling pressure.
You wrote that you don’t like using this indicator to generate trade signals.
I have used it many times to find sell signals in the gold market.
We don’t like to use this technical analysis indicator alone. It generates too many false signals, and the stop losses increase.
It is excellent for doing a weekly timeframe analysis, but to operate, it must be associated with some other indicators.
If you don’t want to use another indicator, you can associate it with some price action patterns.