Chaikin Money Flow (CMF) is an indicator of market power developed by Marc Chaikin, who became a stockbroker in 1966. For the most part, CMF is based on the Accumulation / Distribution (A / D) indicator as it compares the close and the pair with the range (high and low) of the pair for the same period backward to determine whether money flows in or out of the pair during that period. The default backward period, as suggested by Marc Chaikin, is 21 days. As a general rule, when the CMF indicator rises, this means that the money starts flowing into the pair and when the CMF indicator falls, this means that the money starts to flow out of the pair.
The CMF indicator is calculated in four stages. In the first step, the Money Flow Multiplier is calculated for each period that forms backward periods using the formula:
Money Flow Multiplier = ((Close – Low) – (High – Close)) / (High – Low)
In the second step, the Volume Money Flow is calculated by multiplying the Volume of each period and the Money Flow Multiplier:
Money Flow Volume = Volume x Money Flow Multiplier
In the third step, the amount of the Money Flow Volume for the period back is calculated by adding the Money Flow Volume to each period of its compilers.
So the amount of Money Flow Volume for the period backwards divided by the amount of period Volume backward.
The result is a line that is oriented above and below the zero line as it fluctuates between +1 and -1.
As with Accumulation / Distribution (A / D) and On Balance Volume (OBV), the direction of CMF indicates a buy or sell strength with an increased CMF indicating an increase in demand for the pair, while a decreasing CMF indicates a decrease in demand for the pair.
The CMF indicator is also included in the oscilator indicator type which is above and below the zero line. Thus, when the CMF crosses above the zero line then this indicator gives a potential buy signal to place a buy position in the market. Conversely, when the CMF crosses below the zero line, it provides a potential sell signal to place a sell position in the market.
The divergence analysis can also be applied to CMF. As per the rules of general divergence.