Chaikin Money Flow
Of all the many useful technical instruments, the Chaikin Money Flow is one that can offer an early sign of an impending trend. Although Chaikin Money Flow can perform as a lagging indicator, so price turns after it does, it would be prudent to give it some attention. A lot of these tools are only founded on price momentum changes. The analysis of technical trends is formed inside the dealing range and any chartists will be on the lookout for support and resistance tests in lots of formats. Chaikin Money Flow doesn’t behave this way. Chaikin Money Flow is founded upon the study of trends in volume and whether it is buyers or sellers that are running trading activity. The Chaikin Money Flow works by comparing the sum of the volume to the price at close as well as the day’s highs and lows to determine the number of deals on a certain stock. It was Marc Chaikin who developed the Chaikin Money Flow. As a seasoned dealer he saw that trends in securities were normally in an accumulation (buying) or distribution (selling) stage; however, these stages couldn’t be seen on price charts. The common accumulation / distribution (A/D) line was Marc Chaikin’s initial formula. This highlights the results of the day’s buying and selling activity. It will either be sellers or buyers that control a session and the A/D captures the essence of the control. A/D is a momentum oscillator and it shows which side is stronger on a daily basis by using volume flow. The result is normally a point within -1 (seller control) and +1 (buyer control). We can expand this concept across a number of days to establish the long-term trend which is the point that Chaikin Money Flow can be used. Chaikin Money Flow is the result of a number of sessions (the moving average is normally calculated over 21 days) that are then divided by the total volume over the correlating time frame. This is a more complicated calculation, but like a lot of tough calculations, Chaikin Money Flow can now be done instantly online and mapped onto price charts.
How Chaikin Money Flow works in practice
Let’s assume that a rather bullish security has quite a high closing price still within the day’s range and a rising volume and the signal is founded on this. If a security is now shut with a low closing price inside its day’s range with a high volume this means the stock is weak. There is pressure to sell once a security has closed during the bottom half of the trading range of a time frame and buying pressure once a security shuts in the top half of the range. The exact number of the tool’s time frame may be different according to the sensitivity and time constraints of investors. The very first bear signs come with a Chaikin Money Flow below zero. A stock will be under distribution conditions or remains under pressure to sell if the point is below zero. The amount of time the Chaikin Money Flow has been below zero is another potential bearish sign. Negative for longer, the higher the possibility for greater pressure to sell or distribution. If the stock stays under
zero for a long time then greater downward pressure on the price may emerge as the stock attracts a greater bearish mentality. The amount of selling pressure is another potential bearish sign. Generally points at either side of the zero line (below or above 0.10) are too weak to declare a bull or bear position. Move beyond +0.10 and a bull scenario occurs. Equally, below -0.10 and it becomes a bear state. Taking this further, above +0.25 will result in strong pressure to buy and below -0.25 will create strong pressure to sell.
The Bottom Line
Chaikin Money Flow’s best quality is that it frequently provides early sights of impending reverses in price. It’s best to confirm this by combining other indicators but as Chaikin Money Flow is an advanced tool, this should provide an advantage over others as you are able to confirm the change of control and deal before them. But, as with other tools, Chaikin Money Flow can give incorrect signs hence the need for extra independent verification. As it uses a moving average it is frequently a lagging tool so is best used verifying other signs. But as far as indicating early reverses for short term trends it’s one of the best indicators.