Chaikin Money Flow (CMF), developed by Marc Chaikin, is a volume-weighted average of accumulations and distributions over a specific period. So what is Chaikin Money Flow and how to use it? If you do not know yet, let’s take a look at the article below.
What is Chaikin Money Flow?
Chaikin Money Flow (CMF) is an indicator created by Marc Chaikin in the 1980s to monitor the accumulation and distribution of stocks over a specific period. The default CMF period is 21 days. Indicator readings range between +1 and -1. Any cross above or below 0 can be used to identify changes in money flow, as well as buying and selling momentum.
Buying pressure resulted in positive readings, above zero. The continued sell-off in stocks pushed the indicator below zero. When the CMF oscillates near the zero line, it indicates that buying and selling pressure is relatively equal and there is no clear trend. Traders use the CMF system as a tool to identify and evaluate trends in traded stocks.
How to use Chaikin Money Flow?
Chaikin money flow can be used as an input for stock selection and timing considerations.
Money Flow Persistency
When identifying buy candidates, look for evidence of strong liquidity continuity, implying a significant green zone over the past 6-9 months. The main input to the stock selection process should be the stock's Chaikin Power Gauge rating and its recent history. However, backtesting shows bullish stocks have a history of better performance when money flows continue to be strong.
If a stock has some red zones, it shouldn't be a "deal breaker," but instead choose stocks with consistent liquidity whenever possible. Conversely, weaker liquidity continuity could confirm a bearish rating. Funding flow continuity is one of 20 factors ranked in the Chaikin Power Gauge Rating model.
Money Flow Divergence
Money flow divergence occurs when a price movement is not accompanied by a similar change in money flow. Negative money flow divergences can be a great indicator of potential short-term risk, or help identify potential bear candidates when selecting bearish stocks, especially when combined with Chaikin sell signals such as overbought.
In general, money flow should correlate with price changes over time - on average, money flow should become greener as prices increase, and redder as closing prices decrease over time . So if a stock has a short-term rally with positive money flows, it confirms the move and doesn't necessarily add any information.
I hope this article will help you to understand what is Chaikin Money Flow and how to use it. The Chaikin Money Flow Indicator is primarily used as a tool to help gauge the strength of a trend. It is not a trading system designed to provide stop loss points or precise entry and exit prices.
