Chaikin Money Flow
Developed by Marc Chaikin, the Chaikin Money Flow oscillator is calculated from the periodic readings of the Accumulation/Distribution Line. Accumulation/distribution line is one of the indicators using volume. It is used to assess the cumulative flow of money into and out of an instrument. As the price moves depend on supply and demand, it follows the volume.
Chaikin Money Flow is based on the observation that buying support is normally signaled by increased volume and frequent closes in the top half of the period’s range. Likewise, selling pressure is evidenced by increased volume and frequent closes in the lower half of the periodic range.
A positive Chaikin Money Flow signals accumulation, while distribution is signaled by the indicator line below zero. The higher the reading (above or below zero), the stronger the signal.
The indicator often warns of break-outs & provides useful trend confirmation. When price is trading in a range, volume may indicate in which direction a breakout is most likely to occur. Higher volume at peaks means that an upward breakout is more likely. Higher volume at troughs indicates that a downward breakout is more likely.
There are three items that determine if an instrument is under accumulation and the strength of the accumulation.
The first and most obvious signal to look for: If Chaikin Money Flow greater than zero, it is an indication of buying pressure and accumulation when the indicator is positive
The second item: determine how long the oscillator has been able to remain above zero. The longer the oscillator remains above zero, the more evidence there is that the security is under sustained accumulation. Extended periods of accumulation or buying pressure are bullish and indicate that sentiment towards the security remains positive.
The third indication: the actual level of the oscillator. Not only should the oscillator remain above zero, but it should also be able to increase and attain a certain level. The more positive the reading is, the more evidence of buying pressure and accumulation. There is such a thing as weak buying! This is usually a judgment call, based on prior levels for the oscillator.