Chaikin Money Flow (CMF) is a technical analysis indicator that’s used for determining the money flow for a specific security. The indicator was created by Marc Chaikin.
Along with the CMF, Chaikin also developed the Money Flow Volume (MFV), which shows the money moving in and out of a security, currency pair, stock, or commodity.
The most common periods of time used by the CMF are 20 and 21 days respectively. As an indicator, the CMF fluctuates between 1 and -1 as buying and selling pressure changes.
How to read the Chaikin Money Flow (CMF)
The CMF was developed using Chaikin’s theory of buying and selling pressure. Chaikin believed that these pressures could be predicted based on its high and low range. Thus, if prices close at the top of its range, then the CMF will be higher, while lower readings will result in higher selling pressure.
The way that you can incorporate the CMF as part of your trading strategy is as follows:
- The CMF can be used to confirm a price trend. It would be typical to see a high CMF during periods of high prices and low CMF reading during sell-offs.
- The other side to looking at the CMF is to spot divergences and potential reversals. Thus, if price makes a higher high while the CMF makes a lower high, this could be a potential bearish divergence. The same principle could apply when at market bottoms and would constitute a bullish divergence, and possibly a reversal.
Another way you can use the CMF is when the indicator crosses above and below the zero line, which can come in both bullish and bearish varieties depending on the direction of the trend.
In summary, the CMF can give you an insight between the buying and selling pressure of a given security. Although imperfect, it is still a useful tool for confirming a trend’s strength as well as to spot potential reversal points in the market.