Chaikin Money Flow (CMF) is a volume-weighted average of accumulation and distribution over a specified period. Developed by Marc Chaikin, this indicator measures the amount of money flow volume over a given time period, helping traders identify whether a stock is being accumulated (bought) or distributed (sold).
What is Chaikin Money Flow?
CMF oscillates between -1 and +1, though readings typically stay between -0.5 and +0.5. The indicator shows whether money is flowing into or out of a security based on where the close falls within the day's range, weighted by volume.
Key concept: When a stock closes near its high with strong volume, it indicates accumulation (buying pressure). When it closes near its low with strong volume, it indicates distribution (selling pressure).
CMF Calculation
The Chaikin Money Flow calculation involves two main components:
Step 1: Money Flow Multiplier
The multiplier determines where the close is within the day's range:
- Money Flow Multiplier = [(Close - Low) - (High - Close)] / (High - Low)
This value ranges from -1 to +1:
- +1 when close equals the high
- -1 when close equals the low
- 0 when close is at the midpoint
Step 2: Money Flow Volume
- Money Flow Volume = Money Flow Multiplier x Volume
Step 3: Chaikin Money Flow
- CMF = 21-period Sum of Money Flow Volume / 21-period Sum of Volume
Calculation Example
Stock XYZ trading day:
High: $50, Low: $48, Close: $49.50, Volume: 2,000,000
Money Flow Multiplier = [($49.50 - $48) - ($50 - $49.50)] / ($50 - $48)
= ($1.50 - $0.50) / $2 = $1 / $2 = +0.50
Money Flow Volume = 0.50 x 2,000,000 = 1,000,000
The close near the upper half indicates buying pressure.
CMF Signal Interpretation
Positive CMF (Above Zero)
- Indicates accumulation and buying pressure
- Money is flowing into the security
- Bullish signal, especially in uptrends
Negative CMF (Below Zero)
- Indicates distribution and selling pressure
- Money is flowing out of the security
- Bearish signal, especially in downtrends
Signal Strength
- Above +0.25: Strong buying pressure
- Between +0.05 and +0.25: Moderate buying pressure
- Between -0.05 and +0.05: Neutral
- Between -0.25 and -0.05: Moderate selling pressure
- Below -0.25: Strong selling pressure
CMF Trading Strategies
1. Zero Line Crossover
The most basic CMF strategy:
- Buy signal: CMF crosses above zero
- Sell signal: CMF crosses below zero
- Combine with trend direction for better results
Zero Line Trade Example
Stock ABC has been consolidating. CMF has been negative for two weeks.
Price breaks above consolidation resistance as CMF crosses above zero.
This confirms the breakout is supported by accumulation.
Enter long with stop below the consolidation low.
2. Trend Confirmation
Use CMF to confirm price trends:
- Uptrend + positive CMF = strong bullish confirmation
- Downtrend + negative CMF = strong bearish confirmation
- Conflicting signals suggest potential trend weakness
3. Divergence Trading
Look for disagreements between price and CMF:
- Bullish divergence: Price makes lower low, CMF makes higher low
- Bearish divergence: Price makes higher high, CMF makes lower high
4. Breakout Confirmation
Validate breakouts with CMF:
- Bullish breakout should have CMF above zero or rising
- Bearish breakdown should have CMF below zero or falling
- Breakouts without CMF confirmation are more likely to fail
CMF in Different Market Conditions
Trending Markets
- CMF should confirm the trend direction
- Persistent positive CMF supports uptrends
- Persistent negative CMF supports downtrends
Ranging Markets
- Watch for CMF to lead price out of the range
- Accumulation (positive CMF) at support suggests upside breakout
- Distribution (negative CMF) at resistance suggests downside breakout
Combining CMF with Other Indicators
CMF + Moving Averages
- Price above 50 MA + positive CMF = strong uptrend confirmation
- Price below 50 MA + negative CMF = strong downtrend confirmation
CMF + RSI
- RSI oversold + CMF turning positive = potential bottom
- RSI overbought + CMF turning negative = potential top
CMF + Price Patterns
- Bullish pattern + positive CMF = higher probability setup
- Bearish pattern + negative CMF = higher probability setup
CMF Settings and Timeframes
- 21 periods: Standard setting (approximately one trading month)
- 10 periods: More responsive, better for short-term trading
- 50 periods: Smoother, better for identifying longer-term accumulation/distribution
Common CMF Mistakes
- Using CMF signals without considering the overall trend
- Expecting instant reversals when CMF changes sign
- Ignoring price action and relying solely on CMF
- Using CMF on low-volume stocks where data is less reliable
Track Your CMF-Based Trades
Pro Trader Dashboard helps you analyze accumulation and distribution patterns in your trading history.
Summary
Chaikin Money Flow is a valuable indicator for understanding whether money is flowing into or out of a security. By measuring where the close falls within the daily range and weighting it by volume, CMF helps identify accumulation and distribution phases. Use CMF to confirm trends, validate breakouts, and spot potential reversals through divergence. Always combine CMF analysis with price action and other technical tools for the most reliable trading signals.
Learn more: Accumulation Distribution Line and volume analysis.