Chaikin Money Flow (CMF Indicator) Strategy, Formula

Chaikin money flow

Chaikin Money Flow (CMF indicator) is an indicator of technical analysis that is used to measure the volume of Money Flow over a specific period of time. This actually tracks the mone flow volume made by institutions. 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 the 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 or other trading terminals like Upstox Pro.

Money Flow FAQ

How do you read a money flow indicator?

Reading a money flow indicator is not very tough. If the indicator rises you can understand that the money is flowing into the stock. That means there is buying demand, so the stock is likely to move up. Similarly, if this indicator moves down it is assumed that money is flowing out of that stock. So there is selling pressure in it. The price is also likely to move down.

What are smart money flows?

There are two money concepts in the stock market. One is smart money and the other is dumb money. Smar money means simply informed traders and the institution. They have the ability to move the market. So knowing where the smart traders are investing their money is important. On the other hands novice traders are considered as dumb in the stock market. They often make mistakes in the stock market and lose money. So the dumb money is actually absorbed by the smart traders as their profit. The loss incurred by the dumb traders is actually the profits earned by the smart traders.

What is flow of money?

The flow of money simply means investor’s interest in a stock. So if money is flowing towards a stock its buying demand will increase and its price will also move up. And is money is flowing out os a stock, that means there is no buying demand. Rather there is selling pressure and the stock price will fall.

How to set up CMF indicator on the chart?

Chaikin Money Flow on Zerodha Kite

  • You need to open your MarketWatch.
  • Select your stock and open its chart by right-clicking on the chart icon.
  • The chart window of the stock opens where you need to select Studies.
  • Go to Chaikin money flow and click on it.
  • The default parameters of the indicator will be displayed in a small window.
  • The default period of the CMF indicator is 20-period. You can customize this as per your own need
  • Once you select the parameter and click the Done button, the indicator will be visible on the chart.
  • Remember, this is a money flow indicator, so it will not be plotted on the index. This because we actually do not trade the indices, rather we trade their futures.
  • You can plot the CMFon any stock, futures, options and commodities.
Chaikin Money Flow Zerodha

Chaikin Money Flow on Upstox Pro

We can also attach the CMF indicator on the Upstox Pro platform. Parameters are the same here, it is available under the Studies icon.

Chaikin Money Flow Upstox

Chaikin Money Flow Formula

Let us consider Money Flow as MF

  • MF Multiplier = {(C-L) – (H-C)} / (H-L)
  • MF Volume = MF Multiplier / V
  • 20-period Chaikin MF = 20-periods total MF Volume / 20-period total Volume

How to use the Chaikin Money Flow?

  • Generally, a reading of CMF above zero is bullish and a reading below zero is bearish.
  • This indicator is a momentum indicator and this indicates the trend of the price action in totality.
  • We can also use it as an overbought oversold oscillator.

#1 General use of CMF indicator

In general, the CMF can be used with the idea that above zero is bullish and below 0 it is bearish. But this can give many whipsaws in rangebound phases. In the rangebound phase it can go above and below zero several times.

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 +0.25 and considers a bearish position only if it crosses below -0.25. This can help from getting caught in false whipsaws.

CMF Indicator

#2 Using a trend line break on the CMF indicator

The trend line break on the Chaikin Money Flow can also trigger a one-sided move. This can indicate a price move much early.

Trend Line break on CMF Indicator

#3 Chaikin Money Flow divergence trading

The CMF indicator can show very good divergence. When the indicator does not follow the price action, we call it as divergence. Price is moving up but the indicator is moving down is known as the bearish divergence. And price moving down but the indicator is moving up is known as the bullish divergence.

CMF Indicator Divergence

Read more on the CMF indicator and smart money

I suggest reading the following book for further knowledge of volume and money flow: The Trader’s Book of Volume: The Definitive Guide to Volume Trading.

Conclusion

The Chaikin Money Flow or CMF indicator is developed by Marc Chaikin. It helps in identifying which side the smart money is flowing. In simple terms buying pressure is observed when this CMF indicator is above zero and selling pressure is observed when it is below zero. We can trade the indicator in various ways. Out of the trading methods, the trend line break and divergence trading are quite popular.

Chaikin Money Flow (CMF Indicator) Strategy, Formula

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