Chaikin`s Money Flow

Overview

Developed by Marc Chaikin, the Chaikin Money Flow (CMF) indicator is essentially a n-periods volume weighted average of Chaikin's Accumulation/Distribution indicator. The CMF is based on the assumption that the nearer the close price is to the high price of the daily range, the more accumulation has taken place. Alternatively, the nearer the close price is to the low price of the daily range, the more distribution has taken place. The CMF will be positive if price consistently closes above the bar's midpoint with increasing volume, however, if price consistently closes below the bar's midpoint with increasing volume the CMF will be negative.

Interpretation

Chaikin recommends using a value of 21 periods, but other values may also be used. IMPORTANT: It should be noted that the CMF has a weakness -- it does not account for price gaps. If a gap in prices occurs, the CMF indicator will have a NULL value (i.e.: no value) for n-periods after the gap. However, the formula has been slightly altered in VT Trader to avoid any NULL values.

Trading signals can be generated using a few different techniques:

1. Zero line crossings: Readings above zero indicate the instrument is under accumulation while readings below zero indicate the instrument is experiencing distribution. Chaikin considers values above +0.10 to indicate a buy signal (+0.25 is considered strong buying pressure) and values less than -0.10 to indicate a sell signal (-0.25 is considered strong selling pressure).

2. Divergences: Chaikin states that divergences between the Money Flow line and price often elude to forthcoming reversals in market direction. A buy signal occurs when price makes a lower low while the CMF makes a higher low. A sell signal occurs when price makes a higher high while the CMF makes a lower high.

3. Confirmation of Price Breakouts: The CMF can be used for confirmation of price breakouts through trendlines or support/resistance in the direction of the price action. For example, if price breaks down through a support level, a trader may wish to wait until the CMF is below zero or even the extreme level of -0.25 to confirm the breakout direction.

© Help for New Traders