CMF indicator — formula and usage in trading

In this article, we will talk about another interesting indicator of technical analysis — Chaikin Money Flow (CMF). This oscillator can provide very important data on what big players are doing now: they are accumulating positions or, vice versa, they are dumping.

What is the CMF indicator (Chaikin money flow) in simple words

CMF (from the English «Chaikin Money Flow», Chaikin’s money flow) is an indicator that reflects the change in buying and selling pressure, based on volumes and price changes. If it grows, it means that money is invested in the asset. If it falls, then vice versa, the money comes out.

Chaikin Money Flow was created by analyst Mark Chaikin. The CMF has become closely related to two other famous Chaikin indicators: the Chaikin oscillator and Accumulation/Distribution (ADL).

What does the CMF indicator look like on the chart:

An example of Chaikin Money Flow on a real chart


The CMF oscillator ranges from -1 to 1. Where:

  • -1: means maximum downtrend;
  • 1: means the maximum uptrend;

The CMF indicator has one parameter, the period for which the calculation of the cash flow is taken into account. By default, it is 20 or 21 bar.


Since we are talking about trends, it is best to use this oscillator on large timeframes (daily, D).

Chaikin Cash Flow Formula (CMF):


Money Flow Multiplier = [(Close — Low) — (High — Close)] /(High — Low)
Money Flow Volume = Money Flow Multiplier × Volume for the Period
cmf= [Объёма денежных потоков за 21 период] / [21 Период суммы объёма]

or in one formula it looks like this:

CMF = ∑Volume × [(Close — Low) — (High — Close)] /(High — Low) / Period


Note

Chaikin’s money flow is very similar to the standard Money Flow Index indicator, but has a difference: MFI is calculated from 0 to 100, instead of a cash flow multiplier, a typical price (High + Low + Close) / 3 is used.


Cons of CMF

1. When calculating Chayikin Money Flow, the multiplier of cash flow in trading between periods is not taken into account. If a gap appears on the chart (the same dividend), then it will no longer be possible to adequately assess the situation through the CMF, because sync will be lost. In the stock market, price gaps between trading sessions happen regularly.

2. It does not work well in the Forex market, because there is no information about the real volumes of trade.

How to use the CMF indicator in trading

1. Determining the direction of the trend

The easiest way to use Chaikin Money Flow in trading is to determine the direction of the trend. If the indicator value is greater than 0, then the market is bullish; if it is less, it is bearish.

If the value fluctuates around zero, then it is impossible to make any verdict, because the price fluctuates (is in a flat). It is worth waiting or introducing a stricter framework. For example, the range from -0.05 to 0.05 is considered a neutral zone, where there are no directional movements in the market.

2. Divergence

A widely applicable technique in trading called divergence and convergence is perfectly practiced on the Chaikin indicator. In simple words: this is the case when the indicator value does not show a new extreme, and the price at that time sets a new high/low.

3. Trend confirmation

When a position is held, there are many doubts about the correctness of one’s actions. Therefore, CMF will tell the trader the correctness of his expectations.

If the value of CMF > 0 and grows, then the trend can be called strong. There is no point in selling at the moment. The same is true for short positions.

4. Oversold / overbought

You can also highlight the oversold and overbought zones. These are situations in the market when there is a high probability of a trend change or at least its slowdown.

See also the video «Chaikin Money Flow Indicator (CMF)»:

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