Chaikin's Money Flow

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Chaikin's Money Flow

The Chaikin Money Flow indicator was developed by Marc Chaikin and is a further development of the Accumulation/Distribution line. In fact the A/D calculation is used in the Chaikin Money Flow formula.

The formula is to divide the sum of the Accumulation/Distribution Line values for a certain number of intervals, by the sum of the volume amounts for an equal number of intervals:

chaikformula.png

The default number of intervals is 21 as the 21-day Chaikin Money Flow is a good representation of the buying and selling pressure for the past month. Shorter periods will be more volatile and prone to false signals.

Using Chaikin's Money Flow

The Chaikin Money Flow indicator reflects the observation that market strength is usually accompanied by prices closing in the upper half of their range with increasing volume. Likewise, market weakness is usually accompanied by prices closing in the lower half of their range with increasing volume.

Market Strength

If prices consistently close in the upper half of their range on increased volume, then the indicator will be positive and above the zero line. This indicates that the market is strong. Conversely, if prices consistently close in the lower half of their range on increased volume, then the indicator will be negative and below the zero line. This indicates that the market is weak.

Filter for other indicators

Like the Highest High and Lowest Low indicator, the Chaikin Money Flow indicator can be used as a filter. It can be used to provide confirmation of trendline and support or resistance breakouts.

For example, if prices have recently penetrated above a downward sloping resistance, the trader may want to wait for further confirmation by allowing the Chaikin Money Flow indicator to cross above the zero line. This may indicate an overall shift from a downtrend to a new uptrend.

Divergence Detector

As with the stochastic indicator the trader may also seek out divergence.

For example, if the most recent high of the indicator is lower than its previous high, yet prices are continuing upward and the corresponding most recent high is higher than the previous high, this may indicate potential weakness.

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