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10.6 Chaikin Money Flow

The Chaikin money flow index by Marc Chaikin is based on the Accumulation/Distribution index calculations (see Accumulation/Distribution), but just within a past N-day window. The formula is

                                     /      close - low     \
              total N-day  volume * |  2 *  ----------- - 1  |
                                     \      high - low      /
Chaikin MF = ------------------------------------------------
                         total N-day  volume

The Acc/Dist style volume values in the numerator range between +volume and -volume according to “closing location value”. They’re summed and expressed as a fraction of the total volume in that period. This fraction therefore ranges from -1 to +1, but in practice the extremes are rarely reached (since it would require every day to be a close at the day’s high to get +1, or every day at the low to get -1).

The idea is that buying strength is indicated by a close near the top of the day’s range, suggesting buyers have bid it up through to course of the day or recovered from pullbacks. Conversely a close near the bottom of the range suggests sellers in control. The amount of volume this is done on is worked in, as a measure of the significance of the action. In any case positive values are bullish and negative values are bearish in this interpretation, though perhaps with large values representing extremes which are likely to reverse.

This Chaikin money flow is is similar to the plain money flow index (see Money Flow Index), but the latter uses close-to-close up or down, where Chaikin uses close within the day’s range as a fraction, not just an “all or nothing” up or down.

High/low and volume data are required before Chaikin money flow can be drawn, this may not be available for some data sources (some stock indexes in particular).

It should be noted that “money flow” here is a shorthand for the enthusiasm of buyers (or, when negative, sellers). It’s common to speak informally of money flowing into or out of a stock, but of course there’s never actually any net money in or out since for every buyer there’s a seller of the same amount.

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