The Chaikin Money Flow oscillator is a calculation derived from the Accumulation/Distribution Line. The idea behind the Accumulation/Distribution Line is that when a security closes in the upper half of the day's trading range, more buying should occur. When a security closes in the lower half the the day's trading range, selling should occur. In this regard, it is similar to the Stochastics, and RSI indicator since they determine overbought and oversold signals.
The CMF uses this data for a specified period, then divides it by the total volume for the same period to produce the indicator. The volume will be the cumulative total. Like calculating the SMA, when the start of the "n+1" day occurs, the 1st day's values are removed from the equation this way there is always an "n" amount of days in the computation.
The CMF is indicated through a range from negative to positive, with zero in the middle.
For a bullish sign: Naturally, when the CMF line is above 0 (positive), this means that the security is accumulating, or there is more buying than selling. The longer it remains above zero, the more bullish the security is. And how great above zero it is determines how bullish the security is. To determine, above zero, what is high and what is low, look at the previous recordings of the CMF to give you an idea.
For bearish sings: The CMF line has to be below 0 (negative), this means the security is distributing, or more sellers than buyers. The longer is remains below zero, the more bearish the security is. And how great below zero it is determines how bearish the security is. Like the above, to determine, below zero, what is high and what is low, look at the securities past CMF history to give you an idea.
Generally for speaking, the number above and below zero that determines how bullish or bearish an asset is, should be 1 (bullish), or -1(bearish). The higher or lower, the better.
The CMF can be used as divergence indicators as well, but this is unorthodox usage.
It is important that this indicator is used with another. We like to use it with moving averages and the RSI.
