Chaikin Money Flow: Calculation, Trend Confirmation, and Limitations
Summary
Chaikin Money Flow (CMF) summarizes buying and selling pressure over a chosen lookback period. Its calculation weights volume according to where the close falls within each bar’s high-low range, then divides the period’s summed money-flow volume by summed volume. The document notes that 20 or 21 days are common lookback choices and that the resulting value ranges from -1 to 1. Closer to the positive end suggests stronger buying pressure; closer to the negative end suggests stronger selling pressure.
The article describes using CMF to confirm an existing trend when it remains above or below zero, and treating zero-line crossings as possible reversal clues. It cautions that short-term crossings can produce false signals and suggests testing alternative thresholds, such as 0.05 and -0.05. A stated weakness is that the multiplier does not account for changes in trading range between periods, so price gaps may cause the indicator and price action to diverge. CMF is framed as a supporting indicator, including alongside other Chaikin measures, rather than a standalone signal.
Key ideas
- CMF weights volume by the close’s position within each bar’s range and aggregates the result over a selected period.
- Positive and negative readings indicate relative buying and selling pressure, respectively.
- Persistent readings on one side of zero may be used to confirm a prevailing trend.
- Zero-line crossovers can be reversal clues, but may generate false signals.
- Price gaps and unadjusted changes in trading range are limitations of the calculation.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.