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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.
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