The Chaikin Money Flow (CMF) is a technical analysis indicator used to gauge a security's buying and selling pressure. The CMF indicator is calculated by accumulating a security's volume throughout the day and multiplying it by the percent change between the security's high and low prices. The CMF oscillates between 0 and 1, with readings above 0.5 indicating bullish pressure and readings below 0.5 indicating bearish pressure.
Steps to Calculate Chaikin Money Flow
Three unique stages make up the Chaikin Money Flow (CMF) computation (for this example, we'll use a 21 Period CMF):
First, determine the money flow multiplier.
[(Close - Low) - (High - Close)] /(High - Low) = Money Flow Multiplier
Second, determine the volume of money flow.
Volume for the Period x Money Flow Multiplier = Money Flow Volume
Third, determine The CMF
21 Period Sum of Money Flow Volume / 21 Period Sum of Volume = 21 Period CMF
How to Use the Chaikin Money Flow Indicator
The indicator is used to gauge whether money flows into or out of a security, predicting future price movements. When the CMF is above 0.5, it indicates that money flows into the security, which is generally seen as bullish. Alternatively, when the CMF is below 0.5, money flows out of the security, which is generally seen as bearish.
The best way to use the CMF indicator is in conjunction with other technical indicators or chart patterns. For example, some traders will only take trades when the CMF indicator is above 0.5, indicating there is more buying than selling pressure. On the other hand, some traders will wait for the CMF line to cross above or below the signal line, which is a 9-day EMA of the CMF values, before taking a position.
There are many ways to interpret and use the Chaikin Money Flow indicator, so it's essential to experiment with different settings and find what works best for you.
Conclusion
The bottom line is that the Chaikin Money Flow indicator can be a helpful tool for identifying trends in securities prices; however, it should not be used as a standalone tool due to its potential for generating false signals and its lag time. However, when used in conjunction with other technical indicators, it can give you a better idea of where prices are headed so you can make more informed trading decisions.