Chaikin Money Flow Indicator

The Chaikin Money Flow indicator (CMF), developed by Marc Chaikin, determines if a currency is under accumulation or distribution by comparing the closing price to the high-low range of the trading session. CMF indicator was created as an expansion to the On Balance Volume indicator.

If the trading session closes near the higher point of the session with increased volume, the value of CMF is increasing. Similar if the day closes near the lower point with increased volume, the value of CMF is decreasing.

Chaikin Money Flow is calculated as 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 increased or decreased, but the 21 period is generally used and recommended for the technical analysis.

The Accumulation/Distribution indicator is calculated using the formula:

Acc/Dist = [(Close – Low) – (High – Close)] / (High – Low) x Period's volume

So the previous formula is divided by the total volume to obtain the Chaikin Money Flow indicator:

CMF = Sum {[(Close – Low) – (High – Close)] / (High – Low) x Period's volume} / Sum (volume)

The Chaikin Money Flow indicator oscillates around zero line and is bearish when it’s negative and is bullish when it’s positive. Its values can indicate buying and selling pressure. Values oscillating close around 0 (-0.1 to +0.1) are too weak to offer a signal. Values lower than -0.1 or higher than +0.1, indicate buying and selling pressure. Values below -0.25 and above +0.25 suggest strong buying and selling.

Chaikin Money Flow has a weakness: large opening gaps are not always reflected in the indicator because it doesn’t reflect the changes day by day. The indicator focuses on the location of the close relative to the range for the period this representing the strength of Chaikin Money Flow indicator.

Some times Chaikin Money Flow can give its own signals but it should be used to clarify other indicators and confirm the decisions already made.

In the Forex technical analysis is important to choose indicators that complement each other. Using indicators with common characteristics would be a waste of time. A possible combination of indicators for the technical analysis including this indicator would be: Chaikin Money Flow, Moving Average Convergence Divergence, and Relative Strength Index.

The Chaikin Money Flow is a non-trend-following volume indicator that will identify buying and selling pressure, Moving Average Convergence Divergence, a trend-following indicator, will identify the primary trend of the currency and the Relative Strength Index as a momentum indicator is used to identify potential oversold and overbought levels.