Marc Chaikin developed Chaikin Money Flow or CMF. It measures the volume-weighted average of accumulation and distribution over a certain period.
What is the Chaikin Money Flow?
The main idea behind the CMF is that the closer the closing price is to the high, the more accumulation occurs. On the other hand, the closer the closing price is to the low, the more distribution occurs. If the price action consistently closes above the candlestick or bar’s midpoint, the CMF is positive. Whereas, if the price closes below the midpoint, the CMF is negative.
The formula for the Chaikin Money Flow is as follows:
CMF = n-day Sum of [(((C – L) – (H – C)) / (H – L)) x Vol] / n-day Sum of Vol
n = number of periods, typically 21
H = high
L = low
C = close
Vol = volume
The Chaikin Money Flow oscillator calculation, which is an accumulation/distribution indicator, is done by subtracting a 10-day exponential moving average (EMA) of accumulation/distribution line from a 3-day EMA of the accumulation/distribution line. This measures price fluctuations around the accumulation/distribution line.
To simplify the working of CMF, here is an example.
Suppose a man named John is at an auction. When the auction takes place, there are buyers or accumulators on one side, and on the other side, there are sellers or distributors. When the sellers are more in number than buyers, the price of the product decreases. Conversely, when the buyers are more in number, the price of the product increases.
How to use the Chaikin Money Flow?
To utilize the CMF, the Chaikin oscillator is used. It signifies the momentum during price fluctuations in accumulation/distribution. Traders could also choose to apply the MACD indicator, along with the Chaikin oscillator.
For example, if a trader wants to find out whether EUR/USD is more likely to go up or fall, and the MACD is trending higher. The Chaikin oscillator will generate a bullish divergence.
Generally, the Chaikin oscillator creates a bullish divergence when it crosses above a baseline. The baseline is the accumulation-distribution line. A cross above that line indicates that traders are buying more.
The CMF oscillator produces two buy and sell signals. First, a positive divergence occurs when the central line crosses above the accumulation/distribution line. This gives a buy signal. In comparison, a negative divergence appears when the central line crosses below the accumulation/distribution line. It then gives a sell signal.
A positive divergence is a signal of upward momentum, while the negative divergence is a signal of downward momentum.
Chaikin Money Flow Index trading strategy
The CMF oscillator can be used on any chart timeframe, from the hourl to daily and the weekly charts. Thus, day-trader and long-term traders can utilise the Chaikin Money Flow indicator.
Chaikin Money Flow Index buy strategy
- Apply the CMF oscillator on the chart.
- The central line must cross above the accumulation/distribution line.
- Wait for the price bar to go bullish before entering.
- Enter the trade when the indicator is moving upwards.
- Place a stop-loss near the recent low from the entry point.
- Exit the trade on high.
Chaikin Money Flow Index sell strategy
- Apply the CMF oscillator on the chart.
- The central line must cross below the accumulation/distribution line.
- Wait for the price bar to go bearish before entering.
- Enter the trade when the indicator is moving downwards.
- Place a stop-loss near the recent high from the entry point.
- Exit the trade on low.
Chaikin Money Flow Index conclusion
The Chaikin Money Flow belongs to a family of momentum oscillators, and can work better when combined with its other family members like the MACD. The Chaikin Money Flow Indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
I would prefer to use the majority of indicators such as the Chaikin Money Flow Indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Chaikin Money Flow Indicator is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Chaikin Money Flow Indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Chaikin Money Flow Indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.