- Type of Indicator: Volume
- Creator: Marc Chaikin
- When Created: 1980s
- First Mentioned In: Investing in Equities by Marc Chaikin
What Is The Chaikin Money Flow (CMF)?
The Chaikin Money Flow (CMF) is a technical analysis tool that is used to measure the amount of money flow into or out of an asset. It is a volume-based indicator that takes into account both price and volume data.
The CMF is calculated by taking the difference between the sum of the accumulation/distribution line (ADL) over a specific time period and the sum of the ADL over the previous time period, and dividing it by the total volume over the same time period.
How Do You Read The CMF?
The Chaikin Money Flow provides traders with information about the amount of money flow into or out of a security. The tool can be used to identify potential trend reversals and to confirm trends that are already in place.
How Does The CMF Work?
The Chaikin Money Flow works by measuring the amount of money flow into or out of an asset based on the volume and price data.
When the CMF is positive, it indicates that there is more buying pressure than selling pressure. In contrast, when it is negative, it indicates that there is more selling pressure than buying pressure.
How Is The Chaikin Money Flow Calculated?
The calculation for the Chaikin Money Flow involves taking the difference between the sum of the ADL over a specific time period and the sum of the ADL over the previous time period, and dividing it by the total volume over the same time period.
The ADL is a cumulative measure of the money flow into or out of n asset based on the direction and volume of each day’s price movement.
The Encyclopedia Of Technical Market Indicators, Second Edition
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Trend Identification: Traders can use the CMF to identify potential trend reversals and to confirm trends that are already in place. When the CMF is positive, it may indicate buying pressure and a potential uptrend. When it is negative, it may indicate selling pressure and a potential downtrend.
Entry and Exit Points: Traders can use the CMF to identify potential entry and exit points. For example, a buy signal may be generated when the CMF crosses above the zero line, indicating buying pressure. A sell signal may be generated when it crosses below the zero line, indicating selling pressure.
Divergence: Traders can also use the CMF to identify potential divergence between the price and the indicator. For example, if the price is making higher highs while the CMF is making lower highs, it may indicate a trend reversal.
Additional Trading & Risk Management Tips
Combine the Chaikin Money Flow in conjunction with other technical indicators and chart patterns to improve the accuracy of trading signals.
Adjust the time period for the CMF to suit your specific trading style and the market you are analyzing. Shorter periods are more sensitive to price movements. Longer periods are less sensitive and may be more useful for identifying longer-term trends.
Be aware that the CMF is a lagging indicator. This means it reflects past price movements and may not accurately predict future price movements. Therefore, use it in conjunction with other technical analysis tools to make more informed trading decisions.
Use proper risk management techniques to protect your investments, and always consider other factors in addition to the CMF when making trading decisions.
Monitor the position of the CMF relative to the zero line for potential buy and sell signals. Adjust your trading strategy accordingly.
Practice using the Chaikin Money Flow using a TradingView account to backtest performance.