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Chaikin Money Flow Indicator by Marc Chaikin
Appeared in the January 94 issue of Stocks & Commodities magazine

Like the popular Chaikin A/D Oscillator developed by Marc Chaikin, the Chaikin Money Flow indicator is based on the Accumulation/Distribution line. It is created by summing the values of the Accumulation/Distribution Line for 21 periods and then dividing by a 21 period sum of the volume.


Chaikin Money Flow Indicator

sum(((( C-L ) - ( H-C )) / ( H-L )) * V,21) / sum(V,21)

 

e-w-Chaikin_Money_Flow.gif

The interpretation of the Chaikin Money Flow indicator is basedon the assumption that market strength is usually accompanied by prices closing in the upper half of their daily range with increasing volume. Likewise, market weakness is usually accompanied by prices closingin thelower half of their daily range with increasing volume.

If prices consistently close in the upper half of their daily high/low range on increased volume, then the indicator will be positive (i.e., above the zero line). This indicates that the market is strong. Conversely, if prices consistently close in the lower half of their daily high/low range on increased volume, then the indicator will be negative (i.e., below the zero line). This indicates that the market is weak. The Chaikin Money Flow indicator provides excellent confirmation signalsof trendline and support/resistance breakouts.

For example, if a security's prices have recently penetrated a downwards loping trendline (signaling a potential trend reversal), you may want to wait for further confirmation by allowing the ChaikinMoney Flow indicator to cross above the zero line.

This may indicate an overall shift from a downtrend to a new uptrend. A divergence between the Chaikin Money Flow indicator and prices are also significant. For example, if the most recent peak of the indicator is lower thanit's prior peak, yet prices are continuing upward, this may indicate weakness.

Source / From: TOP
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