Chaikin Money Flow

Chaikin Money Flow (CMF) is a volume-weighted oscillator that measures the accumulation and distribution of a stock over a specified period, appearing as a line fluctuating above and below zero in a lower indicator panel. Created by Marc Chaikin, CMF reveals whether institutional money is flowing into (accumulation) or out of (distribution) a stock by analyzing where price closes relative to its daily range combined with volume. For option traders, CMF provides crucial insight into the market’s true intentions – positive readings suggest buying pressure that supports put selling, while negative readings warn of distribution favoring call sales. Unlike simple volume indicators, CMF’s sophisticated calculation captures the quality of money flow, not just quantity.

How CMF Works

CMF analyzes closing position and volume:

The Calculation

  1. Money Flow Multiplier: [(Close – Low) – (High – Close)] / (High – Low)
    • Ranges from -1 to +1
    • Close at high = +1
    • Close at low = -1
  2. Money Flow Volume: Multiplier × Volume
  3. CMF: Sum of Money Flow Volume / Sum of Volume
    • Typically over 21 periods
    • Oscillates between -1 and +1

The result shows net buying or selling pressure.

Reading CMF Values

  • Above 0: Buying pressure (accumulation)
  • Below 0: Selling pressure (distribution)
  • Above 0.25: Strong accumulation
  • Below -0.25: Strong distribution
  • Near 0: No clear pressure

Zero line is the critical level.

CMF Interpretation

Understanding what CMF reveals:

Accumulation (Positive CMF)

  • Closes consistently in upper half of range
  • Volume supporting upward moves
  • Institutions likely buying
  • Bullish for price

Option Strategy: Focus on selling puts

Distribution (Negative CMF)

  • Closes consistently in lower half of range
  • Volume on down moves
  • Institutions likely selling
  • Bearish for price

Option Strategy: Focus on selling calls

CMF Signals for Options

Key signals from this lower indicator:

Zero Line Crosses

Bullish Cross (Above Zero):

  1. CMF crosses from negative to positive
  2. Accumulation beginning
  3. Buying pressure building
  4. Start selling puts

Bearish Cross (Below Zero):

  1. CMF crosses from positive to negative
  2. Distribution beginning
  3. Selling pressure building
  4. Start selling calls

CMF Divergences

Bullish Divergence:

  • Price makes lower low
  • CMF makes higher low (less negative)
  • Selling pressure waning
  • Accumulation starting quietly

Bearish Divergence:

  • Price makes higher high
  • CMF makes lower high (less positive)
  • Buying pressure waning
  • Distribution underway

CMF divergences often lead price by days or weeks.

CMF Persistence Patterns

The power of sustained readings:

Persistent Accumulation

CMF stays above 0.10 for weeks:

  • Strong institutional buying
  • Pullbacks are opportunities
  • Only sell puts
  • Avoid selling calls

Persistent Distribution

CMF stays below -0.10 for weeks:

  • Strong institutional selling
  • Rallies are opportunities
  • Only sell calls
  • Avoid selling puts

Persistence confirms institutional commitment.

CMF Settings and Timeframes

Optimizing for different strategies:

Period Selection

  • 21 periods: Standard (one month)
  • 10 periods: More responsive
  • 50 periods: Major accumulation/distribution
  • 5 periods: Short-term trading

Match to option duration.

Timeframe Application

  • Daily CMF: Monthly options
  • Hourly CMF: Weekly options
  • 15-minute CMF: Day trading
  • Weekly CMF: LEAPS/investing

Advanced CMF Analysis

Sophisticated applications:

CMF Thrust

Bullish Thrust:

  • CMF jumps from negative to above 0.20
  • Rapid accumulation
  • Institutions rushing in
  • Major move starting

Bearish Thrust:

  • CMF drops from positive to below -0.20
  • Rapid distribution
  • Institutions bailing
  • Breakdown imminent

CMF Trend Analysis

Draw trend lines on CMF itself:

  • Rising CMF trend = Increasing accumulation
  • Falling CMF trend = Increasing distribution
  • Trend breaks warn of changes
  • Often lead price reversals

CMF for Weekly Options

Applying this lower indicator short-term:

Weekly Option Settings

  • 10-period CMF on hourly charts
  • 0.15/-0.15 significance levels
  • Zero line crosses for entries
  • Quick 3-5 day trades

Intraday CMF

For 0-1 DTE:

  • 21-period on 5-minute charts
  • Focus on persistence
  • Multiple signals daily
  • Scalping opportunities

Combining CMF with Price

Context is everything:

CMF + Support/Resistance

High Probability Setups:

  • Price at support + CMF positive = Sell puts
  • Price at resistance + CMF negative = Sell calls
  • Confluence increases odds
  • Clear risk levels

CMF + Trend

With Trend:

  • Uptrend + positive CMF = Strong bull
  • Downtrend + negative CMF = Strong bear
  • Trade with institutional flow
  • Avoid counter-trend

Against Trend:

  • Uptrend + negative CMF = Warning
  • Downtrend + positive CMF = Potential bottom
  • Divergence developing
  • Prepare for reversal

CMF vs Other Volume Indicators

Comparing effectiveness:

CMF Advantages

  • Considers closing location
  • Smoothed calculation
  • Clear accumulation/distribution
  • Less noisy than OBV

When to Use Each

  • CMF: Institutional flow
  • OBV: Simple accumulation
  • MFI: Overbought/oversold
  • Volume: Raw activity

Many traders combine multiple volume indicators.

Common CMF Mistakes

Ignoring Price Action: CMF needs context Short Periods: Too noisy for reliability Fighting Persistence: Respect sustained readings No Confirmation: Use with other indicators

Building a CMF System

Systematic approach:

CMF Trend Following

Rules:

  1. Only trade with CMF direction
  2. CMF > 0: Only sell puts
  3. CMF < 0: Only sell calls
  4. Exit if CMF flips
  5. Size up when CMF strong

Daily Routine

  1. Check CMF on watchlist
  2. Note zero line crosses
  3. Flag divergences
  4. Align with price levels
  5. Enter at extremes

Performance Tracking

  • Win rate by CMF level
  • Average profit by CMF strength
  • Divergence success rate
  • Optimal holding period

CMF Special Situations

Unique applications:

Pre-Earnings CMF

  • Rising CMF into earnings
  • Accumulation suggests confidence
  • Positive surprise likely
  • Sell puts aggressively

Breakout Confirmation

  • Price breaks resistance
  • CMF already positive
  • Confirms real breakout
  • Don’t sell calls

Bottom Detection

  • Price making lows
  • CMF less negative each low
  • Accumulation starting
  • Major bottom forming

Key Takeaways

Chaikin Money Flow (CMF):

  • Lower indicator measuring accumulation/distribution
  • Oscillates around zero (-1 to +1)
  • Positive = buying pressure
  • Negative = selling pressure
  • Based on close location and volume
  • Reveals institutional activity
  • Excellent for trend confirmation

CMF is the option seller’s institutional radar, revealing whether smart money is accumulating or distributing behind the scenes. This lower indicator’s focus on closing position relative to range, weighted by volume, provides superior insight into market intentions. Master CMF to align your option trades with institutional flow rather than fighting it. Remember: retail traders make noise, but institutions move markets – and CMF tracks their footprints.