The Basics of Chaikin money flow

This indicator Developed by Marc Chaikin. Chaikin money flow indicator used to identify demand and supply pressure in the market. This is an oscillator indicator and Chaikin money flow indicator simply sum money flow volume previous period and give you a clear-cut result for good buying and selling decisions.

 

Indicator Type

Identify buying and selling pressure in the market. 

 

Markets

This indicator for all cash / future market (please note this is not for options)

 

Works Best

This indicator work in all types market and all-time frame but this indicator very famous for intraday trading and Trading Chanakya suggestion 1-week time frame give you better and noise-free result.

 

Formula

Chaikin money flows some step for calculation.

 

1. calculate the Money Flow Multiplier for each period.

     Money Flow Multiplier = [(Close – Low) – (High – Close)] /(High – Low)

 

2. multiply this value by the period’s volume to find Money Flow Volume.

     Money Flow Volume = Money Flow Multiplier x Volume for the Period

 

3. sum Money Flow Volume for the 20 periods and divide by the 20-period sum of volume.

     20-period CMF = 20-period Sum of Money Flow Volume / 20 period Sum of Volume 

 
 

Previous periods Money Flow Volume depends on the Money Flow Multiplier. Basically almost every trader a big headache how to identify positive and negative volume average. Volume is very big part of trading decisions. Chaikin money flow indicator short out this problem easily very simple interpretation the multiplier is positive thats mean this is positive (bullish) scenario and the multiplier is negative its mean negative (bearish) scenario.   

     Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1).

 

this is alt text chaikin money flow (image 1)
this is chaikin money flow (image 1)

Check this state bank of India chart if (CMf) line drop negative side price start bearish very fast. Approx 10% downside movement only within some days.

 

this is alt text image for chaikin money flow indicator image2
this is a caption image for chaikin money flow indicator image 2

Check this another one state bank of india chart if (CMF) line up positive side showing on chart price up approx 40% this is a very clear shot vision and power/importance of Chaikin money flow and volume.

 

Parameters 

alt text image for chaikin money flow indicator
this is a caption image for chaikin money flow indicator settings

Parameters basically used for trader comfort but most users start with 20 or 21 periods set. And mostly charts default settings are 20 periods. Facility available for change indicator settings easily as per trader comfort because every trader hold time is not similar and change color pattern easily.

 

Theory

Chaikin money flow is a technical analysis indicator used to money flow volume measure. It’s showing in very clear vision buying and selling pressure in the market for help better and powerful trading decision. Chaikin money flow sums Money Flow Volume over a user-defined number of periods and divides by the total volume for that number of periods. The result varies between 1 and -1.

Developer Marc Chaikin believed that if previous periods closing price in the upper half of the range, then buying pressure is higher. Opposite side, if the previous period closes in the lower half of the range, its mean selling pressure is high.

If a stock, for example, state bank of India closed its high for 20 previous periods, each periods volume would be multiplied by 1, its mean all volume went to the bulls market. Very-very rare chance if a stock closed its high and multiplied by1, and price drop continuously.

For sideway (choppy market) Chaikin money flow not give you clear vision this indicator only oscillate only -0.50 and +0.50 range. 

Interpretation

Very simple interpretation of Chaikin money flow this indicator indicates you buying and selling pressure in the market. (CMF) line above zero its mean buying pressure is strong and (CMF) line below zero line its mean selling pressure is strong.

When (CMF) crosses zero any side this is a alert moment because market any time trend changing probability is very at this point.

You want to reduce some false signal’s so please wait for cross (CMF) line -0.05 and +0.05 this is help reduce mane false signals.

Avoid traditional money flow indicator, and divergence Chaikin money flow and price are not a more effective. For example, even if  the indicator set a lower peak in positive way it is still in positive way. Price momentum indicate slow down but price direction does not necessarily follow in this situation. Users can take a lower high as a warning but each peak should be taken on its own.


Chaikin Money Flow does have a problem handling gaps. For example, if a stock open in gap up and closes in the bottom point in this situation money flow give you negative scenario.This despite the rather bullish price jump.


There is also a problem with volatile script. Even there are valid up and down trend in place. (CMF) indicate you wrong signals and trading chanakya advice in this case (CMF) Analysis not a very good candidate.

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