Chaikin Money Flow (CMF) developed by Marc Chaikin is a volume-weighted average of accumulation and distribution over a specified period. The standard CMF period is 21 days. The principle behind the Chaikin Money Flow is the nearer the closing price is to the high, the more accumulation has taken place. Conversely, the nearer the closing price is to the low, the more distribution has taken place. If the price action consistently closes above the bar's midpoint on increasing volume, the Chaikin Money Flow will be positive. Conversely, if the price action consistently closes below the bar's midpoint on increasing volume, the Chaikin Money Flow will be a negative value.
How this indicator works
- A CMF value above the zero line is a sign of strength in the market, and a value below the zero line is a sign of weakness in the market.
- Wait for the CMF to confirm the breakout direction of price action through trend lines or through support and resistance lines. For example, if a price breaks upward through resistance, wait for the CMF to have a positive value to confirm the breakout direction.
- A CMF sell signal occurs when price action develops a higher high into overbought zones, with the CMF diverging with a lower high and beginning to fall.
- A CMF buy signal occurs when price action develops a lower low into oversold zones, with the CMF diverging with a higher low and beginning to rise.
CMF = n-day Sum of [(((C - L) - (H - C)) / (H - L)) x Vol] / n-day Sum of Vol
Where: n = number of periods, typically 21 H = high L = low C = close Vol = volume