CMF (Chaikin Money Flow)

CMF (Chaikin Money Flow) is a volume oscillator that was developed by Mark Chaikin in 1970's. Besides CMF, Chaikin developed AD (Accumulation/Distribution) and CHO (Chaikin Oscillator) oscillators that are listed among the standard indicators of Marketscope.

CMF is intended to be an auxiliary indicator confirming or declining the trading signals of other technical analysis tools it is used in conjunction with. Together, the oscillator and tools, help to determine the market price trend's direction, strength, and reversal points.

For this purpose, CMF measures the volume of ticks (an instrument's price changes that happen every time when a certain number of trades take place on the market) flowing into (accumulation) and out (distribution) of an instrument during a specified time period. The oscillator's values are obtained by, first, calculating the sum of the AD oscillator's values of a specified number of periods, then, calculating the sum of the oscillator's tick volume values of the same number of periods, and, finally, dividing the sum of the AD oscillator's values by the sum of the oscillator's tick volume values. (The mathematical formulas are provided later in the article). A running total of the CMF values forms a line (or a histogram as a trader's choice can be). The line fluctuates above and below the zero line. When the CMF line is above the zero line, the buying (accumulation) tendency prevails over the selling (distribution) one. As a result, the market prices go up forming an uptrend. On the contrary, when the CMF line is below the zero line, the selling (distribution) tendency prevails over the buying (accumulation) one, the market prices go down forming a downtrend. The further away from the zero line the oscillator's values are, the stronger the respective tendency is.

As a rule, the direction of the oscillator's line coincides with the direction of the market price trend, but sometimes the oscillator's line diverges from the market price trend's direction, thus, forewarning of possible trend reversals.

Please note that CMF is always drawn in an additional area below the market price chart.

On the following picture you can see an example of the CMF oscillator drawn as a line in an additional area below the market price chart.

CMF inherits the drawbacks of the AD oscillator, the data of which it uses in its calculations. It can overlook such important events as minor changes and gaps (when the bars of two consecutive periods do not overlap each other) of the market prices. For more information, see the AD (Accumulation/Distribution) article.

Please remember that, for its calculation, the oscillator uses the historical data, and all the information it provides belongs to the past. A trader can only suppose that the past tendencies will continue to develop in the same way for some time in the future and try to use them appropriately.

To apply a CMF oscillator to a chart, a trader needs to follow the procedure common to all Marketscope indicators. For more information, see theAdd Indicator article.

During the procedure, a trader can customize an oscillator by specifying its parameters in the Properties dialog box. For more information, see the Change Indicator Properties article.

The parameters fall into two groups:

• Calculation - the parameters needed to calculate an indicator's prices.
• Style and Appearance - the parameters needed to specify the way an indicator appears on a chart.

In addition to the traditional Line color, Line width, and Line style parameters, the Style list includes three more entries:

• Display mode - the parameter allows specifying the way the oscillator is to be drawn on the chart (either as a line or histogram). The possible values are Line and Histogram. The default value is Line.
• Up histogram color - the parameter allows to specify the color of the histogram's bars that are above the zero line.
• Down histogram color - the parameter allows to specify the color of the histogram's bars that are below the zero line.

On the following picture, you can see examples of the CHO oscillator drawn as a line and histogram.

The parameters are available on the Parameters tab of the CMF Properties dialog box under the Style heading.

CMF has two Calculation parameters:

• Number of periods - the parameter allows specifying the number of periods, over which the oscillator is to be calculated. The possible values are from 1 through 1,000. The default value is 21. The smaller the number is, the more sensitive to the tick volume changes the CMF line (or histogram) is and vice versa. Traders choose the Number of periods values in accordance with their need of the oscillator's sensitivity. The most popular is the default value - 21.
• A/D calculation mode - the parameter allows to specify the calculation mode of the AD indicators used in the calculation of the CHO values. The possible values are Classic, Classic Incremental, and Trade Station. For more information, see the AD (Accumulation/Distribution) article. The default value is Classic Incremental.

The parameters are available on the Parameters tab of the CMF Properties dialog box under the Calculation heading.

When a CMF oscillator is drawn on a chart, a trader can analyze its information and try to interpret it correctly. CMF can be used to confirm or decline two major trading signals:

• Trend Confirmation During a strong uptrend or downtrend, moving of the CMF line or histogram bars away from the zero line in the same direction as the market price moves confirms the current price trend.
• Divergences Divergences occur when the market prices and the oscillator move in the opposite directions (divergence itself) or towards each other (more precisely called convergence, but in the article we'll stick to the term 'divergence' in both cases). It is a signal of a possible trend reversal. Divergences can be of two types:

• Bullish divergence occurs when an instrument's prices move down, but the CMF oscillator moves flat or upwards. This indicates the growth of the instrument's tick volume that can be treated as a confirmation of a possible bullish reversal predicted by another indicator (or indicators), with which CMF is being used in conjunction.
  On the following picture, you can see an example of a bullish divergence.
  
  
• Bearish divergence occurs when an instrument's prices move upwards, but the CMF oscillator moves flat or down. This indicates the decline of the instrument's tick volume that can be treated as a confirmation of a possible bearish reversal predicted by another indicator (or indicators), with which CMF is being used in conjunction.
  On the following picture, you can see an example of a bearish divergence.
  
  

The CMF oscillator's values are calculated automatically using the following formulas:

CMF = Sum of AD / Sum of TV

Sum of AD = AD_i + AD_i-1 + ... + AD_i-N+1

Sum of Tick volume = TV_i + TV_i-1 + ... + TV_i-N+1

where:
CMF - is the CMF value of the period being calculated.
Sum of MA - is the sum of the AD oscillator's values of N periods.
Sum of TV - is the sum of the Tick Volume values of N periods.
AD_i - is the AD oscillator's value of the period being calculated.
TV_i - is the Tick Volume value of the period being calculated.
N - is the number of periods, over which the CMF oscillator is to be calculated.