The similarities between the Chaikin money flow (CMF) oscillator and the money flow index (MFI) end with the idea that they are both commonly used by active traders to monitor the flow of money and/or momentum. Yes, while both are commonly used momentum indicators on stock charts, the math underlying each indicator—and how traders interpret signals—is quite different.
Chaikin Money Flow Oscillator
Created by Mark Chaikin, the Chaikin money flow oscillator is similar to the more widely used Moving Average Convergence Divergence (MACD) indicator because it uses two different exponentially weighted moving averages (EMAs) to analyze momentum. MACD is generally calculated by subtracting the 26-period EMA from the 12-period EMA.
KEY TAKEAWAYS
- Chaikin money flow oscillator and money flow index are both momentum indicators, but the similarities end there because the ways the indicators are calculated and interpreted are different.
- Chaikin is similar to MACD in that both indicators use exponential moving averages in their calculations.
- When the Chaikin money flow indicator is red, it suggests the market is in a downtrend and when it is green, the indicator suggests an uptrend.
- Money flow index uses volume in combination with recent price movements to determine trends and to determine whether a market is overbought or oversold.
In the case of the Chaikin Money Flow, the indicator uses the difference between a 3-day exponentially-weighted moving average of the accumulation/distribution line and the 10-Day EMA of the accumulation/distribution line. Meanwhile, the accumulation/distribution line (also developed by Chaikin) is a separate indicator that attempts to quantify the amount of money coming in (volume) and its impact on stock prices.
