index etf credit spread iron condor option advisory options trading system service using puts and calls, spreads and condors trader strategies

Chaikin Money Flow

The Chaikin Money Flow indicator is calculated from the Accumulation/Distribution Line, so let's first define the accumulation/distribution line. 

The Accumulation/Distribution Line (A/D line) was developed by Marc Chaikin and is one of the most popular volume flow indicators to assess the early cumulative flow of money into and out of a security in order to anticipate price moves of the stock.   An up-trending A/D Line suggests that buying pressure is building on higher volume, and a down-trending A/D Line indicates that selling pressure is building on higher volume. The basic premise behind the A/D line is that an increase in the volume of shares traded, e.g. per day, will precede an eventual move in the price of the stock.  Many times before a stock advances there will be a period of increased volume in the stock on the UP days just prior to the price move of the stock.  The A/D line focuses on the price action for a given period (e.g. daily) and generates a value based on the location of the close, relative to the range for the day. We will call this value the "Close Location Value" or CLV. The CLV ranges from plus one to minus one with the center point at zero.  Below is a summary of the the rules to calculate CLV.

1. If the stock closes on the high, the top of the range, then the value would be plus one.

2. If the stock closes above the midpoint of the high-low range, but below the high, then the value would be between zero and one.

3. If the stock closes exactly halfway between the high and the low, then the value would be zero.

4. If the stock closes below the midpoint of the high-low range, but above the low, then the value would be between zero and minus one.

5. If the stock closes on the low, the absolute bottom of the range, then the value would be minus one.

Once the CLV is calculated, it is then multiplied by the corresponding period's volume, and the cumulative total forms the A/D Line.  Below is an example of CIEN and how the A/D line is calculated, courtesy of stockcharts.com.

 

Chaikin Money Flow

Building on the Accumulation/Distribution Line that is defined above, the formula for the Chaikin Money Flow (CMF) is the cumulative total of the Accumulation/Distribution Values for 21 periods divided by the cumulative total of volume for 21 periods.  Below is an example, courtesy of stockcharts.com showing what the CMF looks like.  The purple box encloses 21 days of Accumulation/Distribution (A/D) Values.  The total A/D values over 21 days divided by the total volume over 21 days forms the value of CMF at the end of that 21 day series, denoted by the purple arrow. To calculate the next day, the A/D value from the first day is removed and the value for the next day is entered into the equation.  Generally speaking, CMF is bullish when it is positive, indicating that the security is under accumulation.  And CMF is bearish when it is negative, indicating the security is under distribution.