Marc Chaikin developed the Chaikin Money Flow (CMF) to combine price and volume information into one indicator. It was developed based on the belief that price follows volume. The indicator fluctuates above and below zero, highlighting whether the stock is in a bullish or bearish phase. The CMF is mostly a confirmation tool to help isolate strong trends, although it can be combined with a moving average or support/resistance to provide trade signals. To use the CMF effectively, traders should understand how the indicator works, its applications, as well as its strengths and weaknesses.
What Is the Chaikin Money Flow?
CMF incorporates both price and volume and into one indicator. Traditionally, it is used on daily charts over a 21-period time frame, which is approximately one month in trading days.
When prices are closing in the upper portion of the day the indicator moves higher; when prices are closing in the lower portion of the day the indicator moves lower.
Sustained buying—or closes in the upper portion of the daily range—will push the indicator above zero (0). Sustained selling—closes in the lower portion of the daily range—will push the indicator below zero (0). Volume is also factored though, so each day is multiplied by its volume. Therefore, an up day on high volume will result in a bigger jump in the indicator than an up day on low volume.
When the indicator fluctuates around zero it means the stock has little trend, and buyers and sellers are evenly matched. When the indicator stays above zero for a sustained period of time, especially with increasing indicator values, it shows a strong uptrend. If the indicator is below zero for a sustained period of time, and indicator values are decreasing, it shows a strong downtrend.
Figure 1 shows how the CMF looks on a chart.
Chaikin Money Flow Calculation
Calculating the CMF takes two steps:
Daily MF = [(Close – Low) – (High – Close)/ (High – Low)] * Volume
CMF = 21 Day Average of Daily MF / 21 Day Average of Volume
Many trading platforms and charting sites divide the CMF by 100, making it a decimal. For example, some platforms will show readings of 28, or -5, and others will show it as 0.28 or -0.05 respectively.
The CMF is available on most trading platforms, such as ThinkorSwim, and a number of free online charting sites including FreeStockCharts.com and StockCharts.com.
How Chaikin Money Flow Is Useful
The CMF indicator is used primarily as a confirmation tool, and therefore can be combined with other indicators or chart patterns to find trade signals. One method is to apply a moving average to the chart, and capture trend trades. Another method is to use the CMF to confirm breakouts.
With both the methods, the number of days used in the CMF calculation can be altered to suit individual trader needs. The 21-day indicator is for short-term or swing traders. A six month or 126-day time period can be used by traders looking to catch intermediate trends and trades lasting several months. A 12 month CMF, or 252 trading days, will show the long-term accumulation or distribution of a stock.
The longer the time frame used, the slower it is to react to trend changes.
Be sure to also read our Ultimate Guide to the MACD Indicator
Breakout CMF Method
For the breakout method, establish areas of support or resistance which the price has struggled to surpass on multiple attempts. When price moves above the resistance level make sure that the CMF is above zero. If it is, proceed with buying the resistance breakout. When the price moves below a support level, note if the CMF is below zero. If it is, proceed with short-selling the support breakout.
Multiple CMF time frames can be used to further confirm the breakout. Figure 2 uses an 84-period CMF, which is approximately four months. It is above zero when the breakout occurs. You could also check a 21-period CMF, or a 126-period CMF (six months) to see if they are also above zero. If they are all above zero it shows accumulation of the stock over both the shorter- and longer-term, and further confirms the breakout.
A stop loss can be placed just below the old resistance level in the case of a resistance breakout (upside), and just above support in the case of a support (downside) breakout.
Profit targets can be used for an exit, or alternatively, hold long trades until the CMF turns negative. Hold short trades until the CMF turns positive.
Moving Average CMF Method
Since this strategy involves buying when the price is falling, a fixed stop will be hard to implement. Instead place a stop based on a percentage of price. You may opt to give the price 3% leeway from your entry price. Therefore, if you enter at $37.50, you’d place a stop 3% below at $36.37. For more volatile, stocks increase the percentage leeway; for more stable stocks, decrease the percentage leeway.
Profit targets can be used for exits, or use the CMF: hold long trades until the CMF turns negative. Hold short trades until the CMF turns positive.
Chaikin Money Flow Limitations
CMF is predominantly a confirmation tool, helping establish the strength of a trend that can aid in trade selection. Therefore, the indicator itself isn’t a trade system. The trader is responsible for implementing a stop loss and finding a profitable exit based on a strategy, or attempting to interpret the information the CMF is producing. If the CMF is used to exit trades—by flipping from positive to negative or vice versa—the trader won’t know their exit price in advance, which means the reward to risk ratio of the trade is unknown.
Very high or low data values will have a large impact on the indicator. This can skew the indicator reading, and sometimes even make it useless. The large impact is seen on the day the data is first calculated into the indicator, and the day the data drops off from being included in the calculation.
Major Chaikin Money Flow Proponents
Marc Chaikin is the founder of the CMF, and discusses it on his site http://www.chaikinpowertools.com/. He is founder of Chaikin Analytics, which helps investors via an array of market indicator and professional quality research reports.
He has more than 40 years of market experience, is a stock market lecturer and appears regularly on CNBC, Fox Business News and Bloomberg.
The Bottom Line
The CMF showcases price and volume information in one indicator. Rising indicator values show the stock is being accumulated, while a falling indicator value shows the stock is being distributed. The Chaikin Money Flow is mainly a confirmation tool, but it can be combined with support/resistance or moving averages to produce trade signals. Stop losses or targets are not provided by the indicator, so traders need to develop their own, using either support/resistance or a percentage lee-way model. Profit targets can be used, or exit trades when the CMF turns negative on long trades or positive on short trades.
No indicator works all the time, and the CMF may be skewed by days with very high or low data values. Always control risk with a stop loss, and keep position size manageable so a single loss won’t significantly draw down the trading account.