The Chaikin Money Flow (CMF), CMF-MACD Indicators and the CMF-MACD-DIF
The Chaikin Money Flow Indicator weights each day's volume relative to the bar's closing price relative to the bar's range. Based on a concept developed by Larry Williams, each bar's volume is weighted by the following formula: ((C-L)-(H-C))/(H-L) * V.
Marc Chaikin created a ratio of the weighted volume to the total volume over the lookback period. He suggested using a 21-day lookback period. Positive readings by the CMF would indicate the volume was persistently stronger for up closing days, which implied a strong uptrend. Negative readings by the CMF indicated a downtrend. The chart below shows a 13-bar lookback period for 30-minute bars of the QQQs. 13-bars was chosen because 13-bars is one trading day.
Here we see that the CMF crossing above zero confirmed an uptrend. When the CMF was below zero it confirmed a downtrend. Because the CMF is calculating a ratio using a lookback period, there are times when it will lag the change in trend. To create a coincident or possible leading indicator we can use an MACD version of the CMF. An MACD bsed indicator measures the difference between two moving averages. This differencing step can lead changes in the trend.
Here we have the CMF-MACD set to 13 periods for the lookback. The histograms is the difference between a 12 -period and a 26- period exponential moving average of the CMF. The dotted line is the Signal Line, which is a 9-period exponential moving average of the histogram values. If the histograms are positive and drop below the dot then the positive momentum is weakening. On the other hand, if the histograms are negative and the histograms rise above the dots the CMF is gaining positive momentum.
Neither the CMF or the CMF-MACD should be used as stand alone indicators because the trend of prices do not always correlate with the volume action. Still, the CMF and the CMF-MACD displays the volume/price relationship in a unique fashion that can forewarn of changes in the trend. You can experiment with different lookback periods.
The CMF-MACD-DIF is the difference between the CMF-MACD line and CMF-MACD Signal Line.
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