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Chaikin Money Flow Index

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Developed by Marc Chaikin, the Chaikin Money Flow oscillator is calculated from the daily readings of the Accumulation/Distribution Line. The basic premise behind the Accumulation Distribution Line is that the degree of buying or selling pressure can be determined by the location of the close relative to the high and low for the corresponding period (Closing Location Value). There is buying pressure when a stock closes in the upper half of a period's range and there is selling pressure when a stock closes in the lower half of the period's trading range. The Closing Location Value multiplied by volume forms the Accumulation/Distribution Value for each period.

The formula for Chaikin Money Flow is the cumulative total of the Accumulation/Distribution Values for 21 periods divided by the cumulative total of volume for 21 periods.

The number of periods can be changed to best suit a particular security and time frame. The 21-day Chaikin Money Flow is a good representation of the buying and selling pressure for the past month. A month is long enough to filter out the random noise. By using a longer time frame, the indicator will be less volatile and be less prone to whipsaws. For weekly and monthly charts, a shorter time frame is usually suitable.

Generally speaking, Chaikin Money Flow is considered bullish when it is positive and bearish when it is negative. The next item to assess is the length of time Chaikin Money Flow has remained positive or negative. Even though divergences are not an intricate part of the strategy behind Chaikin Money Flow, the absolute level and general direction of the oscillator can be important.

Parameters:

  • Period (21) - the number of bars, or period, used to calculate the study.

Computation

CMF = SUM(AD, n) / SUM(VOL, n)
    where n = Period

AD = VOL * (CL - OP) / (HI - LO)
    AD stands for Accumulation Distribution

Chaikin Money Flow and other Indicators

It is best to choose indicators that complement each other. In a recent interview with Technical Analysis of Stocks and Commodities magazine, Marc Chaikin advises against using indicators that have common characteristics. It would be redundant to analyze both Momentum and MACD. These are both momentum oscillators that are based on the closing price and reflect the rate of change. Their signals will not be exactly the same, but it would be a waste of valuable time to analyze both. Chaikin singles out the Stochastic Oscillator, CCI and RSI as similar indicators. All three are banded momentum oscillators that are good for detecting overbought and oversold conditions. Buy and sell signals are also generated in much the same fashion. All three are excellent indicators, but it would be a waste of time to follow all three when one will be sufficient.

Chaikin Money Flow can be used to identify the tradable trend. If Chaikin Money Flow has been above zero for most of the past three months, then prudence would dictate that the tradable trend is up. The oscillator is indicating that buying pressure prevails. It would not be sensible to attempt a short sale if the tradable trend is up. By identifying the tradable trend, traders can ignore bearish signals and only pay attention to signals that concur. If Chaikin Money Flow indicates that buying pressure prevails, then positive divergences, bullish moving average crossovers, bullish centerline crossovers and bullish oversold crossovers would be potential buy signals. (A bullish oversold crossover occurs when an indicator advances above the oversold line. This would be a move from below 30 to above 30 for RSI). All bearish signals would be ignored, at least as long as Chaikin Money Flow indicated that buying pressure reigned.

One possible combination of indicators would be the following:

  • Chaikin Money Flow - A non-trend-following volume indicator to identify buying and selling pressure.
  • RSI - A momentum indicator used to identify potential overbought and oversold levels.
  • Moving averages - A trend-following indicator to identify the underlying trend in the stock.
  • Price relative - A comparative indicator to identify the strength of the stock relative to a major index.

These four indicators have little in common and complement each other very well.


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