Technical Analysis, Studies, Indicators:
CMF (Chaikin Money Flow)
Patent #: US 7,813,984 B2 Our technology of displaying and presenting intraday volume and volume based technical indicators is protected by copyright law and patent. Unauthorized distribution or reproduction of proprietary technologies will be prosecuted to the maximum extent possible under the law.
Description
The Chaikin Money Flow oscillator was developed by Marc Chaikin and is based on the Accumulation/Distribution.
The Accumulation Distribution indicator is used in technical analysis to define the degree of buying or selling pressure. If a stock trades in the upper half of its period's range, the buying pressure is dominant and the volume associated with this trading range is considered to be Bullish Volume. Alternatively, if a stock trades in the lower half of its period's range, the selling pressure is dominant and the volume associated with this trading range is considered to be Bearish Volume.
Technical Analysis
Like Accumulation Distribution in technical analysis, the Chaikin Money Flow Oscillator (CMF) is a good representation of the buying and selling pressure. In technical analysis, CMF is considered bullish when it is positive and bearish when it is negative.
Chart 1: S&P 500 Index (^SPX) Chart
Buying and Selling pressure defined by the Chaikin Money Flow (CMF)
Like the majority of other oscillators in technical analysis, Chaikin Money Flow signals can be generated on the divergence and crossovers.
- Since negative CMF indicates selling pressure (distribution) and positive CMF indicates buying pressure (accumulation), a buy/sell signal could be generated on the crossover of the CMF and center line (zero line).
- A divergence between price and CMF can also be used to generate signals. A situation in which the price reaches new lows and the Chaikin Money Flow Oscillator does not achieve a new low or begin to move up, could be considered to be Bullish divergence when the selling pressure begins to stop and buying pressure begins to grow. This indicates change in the market sentiment and a possible reversal upward. Controversy, periods when the price makes a new high and the Chaikin Money Flow Oscillator does not make a new high or has started to move down could indicate changes in bullish sentiment toward a bearish mood. Such a divergence can be used to consider selling.
As with many other technical indicators, it is a good idea to use CMF in union with other technical studies. Chaikin Money Flow Oscillator focuses on the location of the close relative to the period's range (between high and low) and does not take into account the previous period close value. Therefore, large opening gaps are not reflected in the oscillator in some cases, which may lead to the misleading signals.
Formula and Calculations
The formula of Accumulation Distribution is
Accumulation Distribution = Σn (CLV x Volume)
where n is the number of periods (bars) that are used and CLV is Close Location Value, which is calculated as
CLV = ((Close - Low) - (High - Close)) / (High - Low)
The Chaikin Money Flow (CMF) is calculated as sum of Accumulation/Distribution over specified period divided by sum of volume for the same period:
CMF = Σn (Accumulation Distribution) / Σn (Volume)
By V. K. for MarketVolume.com
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