Chaikin Money Flow (CMF) Indicator

Type of Indicator

The Chaikin Money Flow (CMF) is a technical analysis indicator that combines price and volume data to determine the flow of money into and out of an asset. It is a volume-based indicator that helps investors understand market strength by assessing whether accumulation (buying) or distribution (selling) is the dominant process.

Purpose

The primary purpose of the CMF is to measure money flow over a specified period and identify potential turning points in the asset's price. CMF can be used to:

• Confirm the direction of a trend,

• Identify overbought and oversold conditions,

• Detect divergences between the indicator and the price.

Calculation Method

Calculating the Chaikin Money Flow involves several steps:

Calculate the Money Flow Multiplier (MFM):

where:

• CC is the closing price,

• LL is the low price,

• HH is the high price.
  

Calculate the Money Flow Volume (MFV):

Sum the Money Flow Volume over the selected period:

• CMF is typically calculated for a 21-day period.

Trading Based on the Chaikin Money Flow Indicator

1. Trend Confirmation:
   

   • When CMF is positive, it indicates a dominance of accumulation, suggesting that prices might continue to rise. This is a potential buy signal.

   • When CMF is negative, it indicates a…