Chaikin Money Flow (CMF)
(You need both CMF_v1 and CMF_T3_v1 for CMF_T3_v1 to load properly.)
Chaikin Money Flow
Chaikin Money Flow (CMF) is another indicator developed by Marc Chaikin, a stockbroker since 1966.
The idea behind CMF indicator lies in combining price and volume in order to view the flow of the money (in or out of the market) during a chosen period. Default CMF period - 21 day.
Hence, the CMF Formula which shows the sum of the values of the 21 period Accumulation/Distribution Line divided by the 21 period sum of volume:
sum(((( C-L )-( H-C )) / ( H-L ))*V ) / sum(V)
How to interpret CMF indicator
Understanding of the Chaikin Money Flow indicator is based on the theory that overall market strength is often accompanied by the price closing in the upper half of its daily high/low range on increased volume. While market weakness is often accompanied by the price closing in the lower half of its daily range on increased volume as well.
Therefore, if price consistently closes in the upper half of its daily range with increased volume, then the CMF indicator will be reading above zero - positive CMF, which suggests that the market is strong.
And vise verse: if the price consistently closes in the lower half of its daily range with increased volume, then the CMF indicator will be reading below zero - negative CMF, which indicates that the market is weak.
How to trade with Chaikin Money Flow
1. CMF above zero - bullish signal - the indicator shows signs of buying pressure - accumulation.
So, you'll be looking to Buy when CMF is above zero, and Sell when it's below.
2. Observation of the previous indicator readings before your trading day starts can give an idea of how long and sustainable the buying/selling pressure was. For example, extended periods of selling pressure (distribution) indicate that sentiment is more likely remain negative for the trading day.
3. Another way to examine the indicator is to look at the intensity of the Chaikin Money Flow readings. Higher readings indicate stronger pressure. For example, CMF readings above 0.10 would be significant enough to guarantee a bullish signal. While readings above 0.25 would be an indication of a really strong buying pressure.
4. CMF indicator offers good confirmation signals of breakouts for various support/resistance levels, in particular, trend lines. For example, if price has recently broken an uptrend line, to confirm it CMF will cross below its zero line after some time, showing that the market is ready to Sell.
5. A divergence between price and Chaikin Money Flow indicator can give early signals about underlying weakness of the move. A situation in which the price reaches new highs and the CMF Oscillator does not reach its new high creates a bearish divergence when the selling pressure begins to grow. This warns traders about a possible reversal ahead. It's similar to MACD divergence, therefore please follow the link to read more.