Crypto 101: Gauging Trend Strength With the Chaikin Money Flow

CoinDesk details the Chaikin Money Flow indicator, which is used to quantify trend strength around volume and market pressure.

If you ever wanted to quantify the strength of a trend based on its volume levels – as well as the degree of buying and selling pressure – there’s a handy indicator that can help you do the job.

The Chaikin Money Flow (CMF) is an indicator, created by Marc Chaikin, that's used to analyze Money Flow Volume over a specific “lookback” period of time, usually 20 or 21 days.

The concept of Money Flow Volume (MVF) is a variable used in the calculations by Chaikin and measures the buying and selling pressure of an asset over a single period. In order to calculate money flow, one must first determine the Money Flow Multiplier used in the overall equation.

To calculate the Money Flow Multiplier for a period:

Money Flow is defined by multiplying the Multiplier with the volume for the current period:

Money Flow Multiplier x Volume for the Period = Money Flow Volume

Thankfully, you don't need to do the equation every single time, as charting websites like TradingView can do it for you.

The Chaikin Money Flow

cmf

The CMF’s value fluctuates between 1 and -1, with the basic interpretation that when the CMF is closer to 1, buying pressure is higher, while, conversely, when below 0 and closer toward -1, selling pressure is higher.

What to watch for

The chart above shows that from period Jan. 6 to Jan 9. 2019, prices began to retrace after a slight rally occurred the day prior.

But with a triggered sell-off along the $4,000 former support zone, the CMF illustrated a huge pickup in selling pressure and confirming the bearish move as legitimate and extensive.

Indeed, savvy investors could have used the CMF to gauge the swift rejection at the neutral zero-line, conserving 9-10 percent of their investment in the process.

Bear/Bull Cross

A bull or bear cross with the CMF simply means a crossover above or below the neutral zero-line when the indicator begins to move and switch from one zone to the other.

Recent price action shows a dip below 0 as it crossed into negative territory amid a minor sell-off, indicating that selling pressure is greater for that current period and the possibility for dipping lower is increased.

However, the CMF isn't always perfect and only posts information after a major move has occurred, allowing one to simply confirm its placement in terms of momentum and volatility.

The CMF is best used in conjunction with other indicators like the relative strength index (RSI), stochastic or Chaikin oscillator in order to provide confirmation to your primary reading.

And while it is useful on all time frames, the CMF functions optimally in analyzing longer-term trends.

Weekly chart

weeklycmf

Here we see the RSI providing a fairly lackluster reading on Dec. 31 of 31.54 combined with the bearish cross on the CMF as price made no new highs after temporarily attempting to rally higher.

Once the CMF reaches the bottom of the range, selling pressure is at its greatest extent and if no further drawdown is achieved then you may consider prices to be stabilizing at those current levels.

But there are limitations...

The Chaikin Money Flow faces limitation in the aforementioned Money Flow Multiplier as it does not take into account the change in a trading range between periods, meaning any price gaps on the chart won’t be picked up and will fall out of sync until an eventual reset or a reconfiguration of the values.

When combined with other indicators, however, the Chaikin Money Flow can be a useful tool for measuring the buying and selling pressure of a particular asset over a specified timeframe and could save you potential losses in the future when used in conjunction with other noteworthy signals.

Disclosure: The author holds no cryptocurrency at the time of writing.

Waves image via Shutterstock; charts by TradingView

This article was originally published on Jul 7, 2019 at 9:00 a.m. UTC

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Sebastian Sinclair

Sebastian Sinclair is a CoinDesk news reporter based in Australia.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.