What Chaikin Money Flow Can Tell you About the Markets

With so many technical tools available, it’s easy to get confused.  But with time, patience and plenty of practice, it gets easier to understand. 

For example, some traders believe that Chaikin Money Flow (CMF) and the Money Flow Index (MFI) are the same thing.  However, the only major similarity between the two is that they are both commonly used momentum indicators.

And that’s pretty much where the similarities end.

From there on out, each is calculated differently.  For example, CMF is similar to moving average convergence divergence (MACD) because it uses two different exponentially weighted moving averages (EMA) to dictate momentum.  With CMF, the indicator is using the difference between the 3-day EMA of the accumulation/distribution (A/D) line and the 10-day EMA of the A/D line.

According to Fidelity:

  • A CMF value above the zero line is a sign of strength in the market, and a value below the zero line is a sign of weakness in the market.
  • Wait for the CMF to confirm the breakout direction of price action through trend lines or through support and resistance lines. For example, if a price breaks upward through resistance, wait for the CMF to have a positive value to confirm the breakout direction.

Simply put, it’s confirming strength of market momentum.

As we can see in this chart of the Dow Jones, stability above the zero line confirmed the uptrend in the market.  It’s not always a reliable indicator, though, so it needs confirmation from other technical tools, such as RSI and Williams’ %R too.

When it comes to MFI, it’s looking at volume in combination with recent price movements to tell if momentum is up or down.  When I use MFI, for example, I use it as a confirming tool with other indicators.  The closer MFI is to its 20-line, the more oversold the stock or index is considered to be.  The closer MFI is to its 80-line, the more overbought the stock or index is considered to be.

There are an incredible amount of technical indicators to be aware of. 

No one expects you to be able to master this off the bat. Give it time.  Practice and have patience. Eventually it will come naturally.