Using Chaikin Money Flow (CMF) For Stock Trading

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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.

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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.

Chaikin Money Flow (CMF Indicator) Strategy, Formula

Chaikin Money Flow (CMF indicator) is an indicator of technical analysis that is used to measure the volume of Money Flow over a specific period of time. This actually tracks the mone flow volume made by institutions. Money Flow Volume, a concept created by Marc Chaikin who also introduced the accumulation distribution line, quantifies the buying and selling pressure on a stock over a single period of time.

CMF is formed on the basis of the accumulation/distribution line. The indicator behaves like an oscillator and moves above or below zero line indicating buying or selling pressure. The indicator oscillates between +1 to -1 with zero line as the midpoint, though the CMF rarely touches the extreme values. You can plot this indicator easily in Zerodha Kite or other trading terminals like Upstox Pro.

Money Flow FAQ

Reading a money flow indicator is not very tough. If the indicator rises you can understand that the money is flowing into the stock. That means there is buying demand, so the stock is likely to move up. Similarly, if this indicator moves down it is assumed that money is flowing out of that stock. So there is selling pressure in it. The price is also likely to move down.

There are two money concepts in the stock market. One is smart money and the other is dumb money. Smar money means simply informed traders and the institution. They have the ability to move the market. So knowing where the smart traders are investing their money is important. On the other hands novice traders are considered as dumb in the stock market. They often make mistakes in the stock market and lose money. So the dumb money is actually absorbed by the smart traders as their profit. The loss incurred by the dumb traders is actually the profits earned by the smart traders.

The flow of money simply means investor’s interest in a stock. So if money is flowing towards a stock its buying demand will increase and its price will also move up. And is money is flowing out os a stock, that means there is no buying demand. Rather there is selling pressure and the stock price will fall.

How to set up CMF indicator on the chart?

Chaikin Money Flow on Zerodha Kite

  • You need to open your MarketWatch.
  • Select your stock and open its chart by right-clicking on the chart icon.
  • The chart window of the stock opens where you need to select Studies.
  • Go to Chaikin money flow and click on it.
  • The default parameters of the indicator will be displayed in a small window.
  • The default period of the CMF indicator is 20-period. You can customize this as per your own need
  • Once you select the parameter and click the Done button, the indicator will be visible on the chart.
  • Remember, this is a money flow indicator, so it will not be plotted on the index. This because we actually do not trade the indices, rather we trade their futures.
  • You can plot the CMFon any stock, futures, options and commodities.

Chaikin Money Flow on Upstox Pro

We can also attach the CMF indicator on the Upstox Pro platform. Parameters are the same here, it is available under the Studies icon.

Chaikin Money Flow Formula

Let us consider Money Flow as MF

  • MF Multiplier = <(C-L) – (H-C)>/ (H-L)
  • MF Volume = MF Multiplier / V
  • 20-period Chaikin MF = 20-periods total MF Volume / 20-period total Volume

How to use the Chaikin Money Flow?

  • Generally, a reading of CMF above zero is bullish and a reading below zero is bearish.
  • This indicator is a momentum indicator and this indicates the trend of the price action in totality.
  • We can also use it as an overbought oversold oscillator.

#1 General use of CMF indicator

In general, the CMF can be used with the idea that above zero is bullish and below 0 it is bearish. But this can give many whipsaws in rangebound phases. In the rangebound phase it can go above and below zero several times.

Sometimes the CMF indicator crosses back and forth the zero line creating whipsaws. A way of avoiding the same is to keep a small room above and below zero. Many traders consider a bullish position only if Chaikin Money Flow indicator crosses above +0.25 and considers a bearish position only if it crosses below -0.25. This can help from getting caught in false whipsaws.

#2 Using a trend line break on the CMF indicator

The trend line break on the Chaikin Money Flow can also trigger a one-sided move. This can indicate a price move much early.

#3 Chaikin Money Flow divergence trading

The CMF indicator can show very good divergence. When the indicator does not follow the price action, we call it as divergence. Price is moving up but the indicator is moving down is known as the bearish divergence. And price moving down but the indicator is moving up is known as the bullish divergence.

Read more on the CMF indicator and smart money

I suggest reading the following book for further knowledge of volume and money flow: The Trader’s Book of Volume: The Definitive Guide to Volume Trading.

Conclusion

The Chaikin Money Flow or CMF indicator is developed by Marc Chaikin. It helps in identifying which side the smart money is flowing. In simple terms buying pressure is observed when this CMF indicator is above zero and selling pressure is observed when it is below zero. We can trade the indicator in various ways. Out of the trading methods, the trend line break and divergence trading are quite popular.

Using Chaikin Money Flow (CMF) For Stock Trading

(You need both CMF_v1 and CMF_T3_v1 for CMF_T3_v1 to load properly.)

Chaikin Money Flow

Chaikin Money Flow (CMF) is another indicator developed by Marc Chaikin, a stockbroker since 1966.

The idea behind CMF indicator lies in combining price and volume in order to view the flow of the money (in or out of the market) during a chosen period. Default CMF period – 21 day.

Hence, the CMF Formula which shows the sum of the values of the 21 period Accumulation/Distribution Line divided by the 21 period sum of volume:

sum(((( C-L )-( H-C )) / ( H-L ))*V ) / sum(V)

Where:
C- close
L – low
H – high
V – volume (21 period)

How to interpret CMF indicator

Understanding of the Chaikin Money Flow indicator is based on the theory that overall market strength is often accompanied by the price closing in the upper half of its daily high/low range on increased volume. While market weakness is often accompanied by the price closing in the lower half of its daily range on increased volume as well.

Therefore, if price consistently closes in the upper half of its daily range with increased volume, then the CMF indicator will be reading above zero – positive CMF, which suggests that the market is strong.

And vise verse: if the price consistently closes in the lower half of its daily range with increased volume, then the CMF indicator will be reading below zero – negative CMF, which indicates that the market is weak.

(Note, the zones has been colored for the illustration purposes only. We don’t have such colored indicator so far; CMF_T3 version is able to show indicator as histogram, which can be switched in the settings).

How to trade with Chaikin Money Flow

1. CMF above zero – bullish signal – the indicator shows signs of buying pressure – accumulation.
CMF below zero – bearish signal – the indicator shows signs of selling pressure – distribution.

So, you’ll be looking to Buy when CMF is above zero, and Sell when it’s below.

2. Observation of the previous indicator readings before your trading day starts can give an idea of how long and sustainable the buying/selling pressure was. For example, extended periods of selling pressure (distribution) indicate that sentiment is more likely remain negative for the trading day.

3. Another way to examine the indicator is to look at the intensity of the Chaikin Money Flow readings. Higher readings indicate stronger pressure. For example, CMF readings above 0.10 would be significant enough to guarantee a bullish signal. While readings above 0.25 would be an indication of a really strong buying pressure.

4. CMF indicator offers good confirmation signals of breakouts for various support/resistance levels, in particular, trend lines. For example, if price has recently broken an uptrend line, to confirm it CMF will cross below its zero line after some time, showing that the market is ready to Sell.
Note, that CMF is a lagging indicator, thus it would take time to confirm a signal, which would suite conservative traders, but may not impress more aggressive traders.

5. A divergence between price and Chaikin Money Flow indicator can give early signals about underlying weakness of the move. A situation in which the price reaches new highs and the CMF Oscillator does not reach its new high creates a bearish divergence when the selling pressure begins to grow. This warns traders about a possible reversal ahead. It’s similar to MACD divergence, therefore please follow the link to read more.

Comments

Hello, thanks for all of your info it truely is one of my favorite websites. I have a breakout ea that trades the breakouts of the donchian channel what other indicator would be good to use for confirmation of a solid break. I looked at this one but it lags. Thinking of adx maybe just a confirm above 20. Thanks for your help!

great job with this site.thanks! very helpful

I tried pasting it on MT4 editor but could not display. Please can you help me. Bryan [email protected]

I used a lot of different indicators, but this is the first one that causes MT4 to crash :(

Do not use CMF_T3_v1.1.mq4. There is some error with it use the first file instead. I have contacted the developer directly and informed him about the issue.

I found on a forum you need to have both files your indicator directory. would have been nice if that was stated.

You need both CMF_v1 and CMF_T3_v1 for CMF_T3_v1 to load properly. CMF_T3_v1 calls CMF_v1 to get information. It could be rewritten fairly easily. I am not going to do this though.

I applaud you for what you are doing. Please do keep up the great work
Just one question, was the problem with CMF_T3_v1 rectified? If i only use CMF_v1, will i get the needed/same results?

thanks again I hope you want for nothing. EVER! You are a good man

I’m using CMF_v1.mq4 as confirmation and happy with the result, pretty accurate on M15. Thanks

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.

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