What is CMF indicator or Chaikin money flow indicator?

As stated by Marc Chaikin, the Chaikin Money Flow Index measures the amount of money flow in a given period of time. The amount of money flow shows the buying and selling pressure.

The Chaikin Money Flow Index calculates the volume of money flow over the past time period (for example, 20 or 21 days). The resulting indicator oscillates above and below the zero line like an oscillator. Chartists weight the balance of buying and selling pressure with Chaikin’s zero money flow level. Additionally, chartists can wait for this indicator to cross above and below the zero line in order to identify changes in money flow. For additional information, we suggest you read the technical analysis training article.

The Chaikin money flow index calculation consists of four steps. The following example is based on 20 time periods. Step 1: Calculate the cash flow coefficient in each period. Step 2: Multiply this value by the volume of the period and get the volume of money flow. Step 3: Add the amount of money flow of 20 time periods and then divide the resulting amount by the total volume of 20 periods.

The volume of money flow of each period depends on the money flow coefficient. When the closing price is in the upper half of the ceiling to floor range, this coefficient is positive and when the closing price is in the lower half of this range, the coefficient is negative.

When the closing price is at its highest value, the money flow coefficient will be equal to 1, and when the closing price is at its lowest value, this coefficient will be equal to -1. In this way, the money flow coefficient adjusts the volume and finally ends up with the money flow volume. As a result, the volume decreases unless the money flow ratio is at its limit (-1 or +1).

The above table shows examples of the use of daily data in the stock review of the National Copper Industries Company of Iran (Famli). You can see that in this time frame, the coefficient of money flow is negative and as a result, the CMF is negative.

Chaikin Money Flow Index (CMF) is an indicator that fluctuates between -1 and +1. This indicator rarely reaches the final values. In order for the 20-day Chaikin money flow indicator to reach +1 (-1), the stock price must close at its price ceiling (floor) in 20 periods. This oscillator usually oscillates between -0.5 and +0.5 and 0 is considered as the middle line.

Chaikin’s money flow index measures buying and selling pressure in a given period of time. Moving to a positive range indicates buying pressure and moving to a negative range also indicates selling pressure.

Chartists can use the absolute value of Chaikin’s money flow to confirm or disconfirm the trend of a stock’s price movements. A positive CMF confirms an uptrend, while a negative CMF questions the strength of the uptrend. The reverse is true for downtrends.

Chaikin’s money flow can be used to indicate buying or selling pressure with positive or negative values. The indicator fluctuates above/below the zero line. Generally, when the indicator is positive, the buying pressure is stronger and when the indicator is negative, the selling pressure is stronger. Although crossing the zero line seems simple enough, the reality is much more complicated.

Chapkin’s money flow index sometimes has a lot of fluctuations when it crosses the zero line and it is difficult to cross it. Therefore, crossing the zero line sometimes leads to the generation of wrong signals and leads the trader astray. Chartists can filter out these false signals by setting the bullish range slightly above zero (+0.05) and the bearish range slightly below zero (-0.05). Although these ranges do not completely eliminate false signals, they can help reduce fluctuations and filter out weaker signals.

The above chart shows the shares of Kaveh South Kish Steel Company (Kaveh) along with the twenty-day CMF indicator. Moving above +0.05 is to confirm the upward trend and moving below -0.05 is to confirm the downward trend. Changing the CMF interval from zero to ±0.05 reduces the number of signals. Delaying these signals is valuable in exchange for reduced volatility.

The above chart shows the shares of Iranian Investment Petrochemical Company (petrol). The yellow boxes where the CMF indicator is within the range of ±0.05 represent a situation that has not yet confirmed buying or selling pressure.

In this chart, you can see 4 signals confirming the trend, which are above or below ±0.05. Although the number of signals is reduced, it reduces the risk of the analyst to make a decision to confirm the trend. It should be noted that the Chaikin Money Flow indicator is not necessarily suitable for all price charts.

The above chart shows the shares of Chadormelo (Kachad) with a total of 6 intersections above and below the zero line, which is not necessarily a good signal for all these intersections and crossing from positive to negative or vice versa. The Chaikin Money Index is best used in uptrends and downtrends. In charts where the price movements do not have a specific trend, this indicator is not very effective. Therefore, the basic analysis of the trend of the chart is very important in using this indicator.

Money flow coefficient in Chaikin money flow focuses on the closing price level relative to the ceiling to floor range in a given time period (day, week, month). Using this formula, if the stock price moves down with a gap but the price closes close to the ceiling, the money flow coefficient increases.

The chart below shows the shares of Saipa (Khasapa) along with the CMF indicator in the daily time frame. You can see that because the price closed near the daily price ceiling, despite the downward gap created in the price, Chaikin’s money flow increased. The reason for this is that the coefficient of cash flow is positive. This indicates that sometimes Chaikin’s money flow is unrelated to price and focuses only on the closing price level relative to the ceiling to floor range in a given time period.