Tuesday, November 24, 2009

Stock Technical Indicator: Chaikin Money Flow

Chaikin Money Flow is calculated from the Accumulation/Distribution line indicator over 21 days. Accumulation shows the buying pressure on certain stocks while Distribution shows the selling pressure on certain stocks. By using Chaikin Money Flow, we can obtain the idea of the buying and selling pressure on certain stocks and we can buy or sell the stocks according to the indicator.

The above picture (taken from ChartNexus) shows an example of Chaikin Money Flow of PBBANK. The Blue color shows positive money flow into the stock while Green color shows money flowing out of the stock.

Since stock price movement is created by supply and demand. So, as a technical trader, you can use this information to predict the movement of the stock by referring to the inflow or outflow of money into the stock.

  • If there are more inflow of money, it means that people are buying the stock and logically, the supply is lowered due to higher demand. Price of the stock will be affected accordingly.
  • If there are more outflow of money, it means that people are selling the stock and the supply is now higher due to lower demand. Price of the stock will also be affected.

An example of Chaikin Money Flow Trade:

The above picture shows an example of Chaikin Money Flow to predict the future price movement of a stock. The example we used is MAYBANK.

It can be seen from the graph that the price movement of MAYBANK is consistent with the Chaikin Money Flow indicator. You can click on the picture to see the larger view of the movement of the price and Chaikin Money Flow.

According to Chaikin Money Flow, the outflow of cash is slowly reducing and money is starting to move into MAYBANK. This inflow of cash affected the price of MAYBANK and created and uptrend for MAYBANK. [Please click on the picture to see the lines I marked and the notes I wrote on the picture.]

The inflow of cash into MAYBANK pushes the price of MAYBANK higher. Thus, if stock traders can spot this inflow of cash into MAYBANK, stock traders can gain huge profit from this trade.

Note: It is advisable to refer to multiple indicators to confirm a trade.


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