Chaikin Money Flow (CMF indicator) is an indicator for technical analysis that is used to measure the volume of Money Flow over a specific period of time. Money Flow Volume, a concept created by Marc Chaikin who also introduced the accumulation distribution line, quantifies the buying and selling pressure on a stock over a single period of time. CMF is formed on the basis of accumulation/ distribution line. The indicator behaves like an oscillator and moves above or below zero line indicating buying or selling pressure. The indicator oscillates between +1 to -1 with zero line as the midpoint, though the CMF rarely touches the extreme values. You can plot this indicator easily in Zerodha Kite.
How to set up Chaikin Money flow in Zerodha Kite?
- Go to MarketWatch.
- Choose the scrip you want to trade.
- Right click on the company name in Kite and select chart from graphic icons.
- Chart window of the stock opens.
- Go to studies. Select studies.
- Go to Chaikin money flow and click on it.
- A small window opens with default parameters of the indicator.
- Once the parameters are selected, the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on stocks price.
- By default, the CMF indicator uses a 20-period simple moving average. These parameters can be customized.
CMF indicator usage in intraday –
- The indicator shows price trend and trading opportunities.
- The picture above shows State Bank of India (SBIN) stock price movement with respect to CMF.
- The chart shows the Chaikin Money Flow indicator in 1 min. timeframe.
- The strategy shows the price trend. Understanding price trend from this indicator is important before creating a position.
- In 1 minute chart, traders may find many whipsaws which will be eliminated if longer time frames are used and this indicator is used with a combination of other indicators.
- Create buy position when CMF is below zero line and going up and exit/ short when CMF is coming down from the top.
Traders can use this indicator to measure the buying and selling pressure over a set period of time. In simple terms buying pressure is observed when this CMF indicator is above zero and selling pressure is observed when it is below zero.
Sometimes the CMF indicator crosses back and forth the zero line creating whipsaws. A way of avoiding the same is to keep a small room above and below zero. Many traders consider a bullish position only if Chaikin Money Flow indicator crosses above +0.5 and considers a bearish position only if it crosses below -0.5. This can help from getting caught in false whipsaws.
Partha, an engineer by education, is theoratically actively following the stock and commodity markets since 1990. He is an active trader since 2003. He has received formal education in future and options and quantum analysis. He is presently working on research oriented projects using Python and data analytics.