Chaikin Money Flow vs. Money Flow Index: What’s the Difference?

Chaikin Money Flow vs. Money Flow Index: An Overview

While both the Chaikin money flow (CMF) oscillator and the money flow index (MFI) are commonly used momentum indicators on stock charts, the math underlying each indicator—and how traders interpret signals—is quite different. Still, they are both commonly used by active traders to monitor the flow of money and/or momentum.

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.

Chaikin Money Flow Oscillator

Created by Mark Chaikin, the Chaikin money flow (CMF) 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.

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.

As you can see from the chart of Amazon.com Inc (AMZN) above, negative money flow (as shown by the period between the two red rectangles) suggests that the directional bias is downward. Positive money flow is marked by the green areas on the Chaikin money flow indicator and suggests that the trend is upward. If the indicator rises above .20 or falls below -.20, it could suggest that the market is overbought or oversold.

Money Flow Index

The money flow index (MFI) is quite different than the Chaiken money flow oscillator because it uses volume in combination with recent price movements to determine whether momentum is up or down. Many traders view this indicator as a volume-weight relative strength index (RSI), which is calculated using average price gains and losses over a period of time (usually 14 days).

Typically, if MFI rises above 80, the market is overbought, and due for a pullback. On the other hand, readings of 20 or less suggest an oversold market that may bounce. As you can see from the chart above, money flow index never moves above or below key overbought or oversold levels on the chart of AMZN as it did in the CMF example. When using the money flow index, buy and sell signals are only generated when the index moves beyond the 20 or 80 levels.

Since Chaikin oscillator and money flow index are calculated using different elements, it is unsurprising to see that the trading signals are quite different. In general, understanding the underlying formula of any technical indicator is essential before using it to generate buy and sell signals.

Key Differences

The CMF is calculated using the money flow volume which factors in the closing price, high price, low price, and volume, typically over a 21-day period. In contrast, the MFI uses the typical, positive and negative money flows based on price changes, and volume over a 14-day period, with its final value ranging from 0 to 100. Therefore, the main difference resides in the calculation method.

These two also differ in their interpretation and usage. CMF values range between -1 and +1, indicating buying or selling pressure, with traders looking for divergences and zero line crosses to signal changes in market sentiment. Meanwhile, the MFI ranges from 0 to 100, identifying overbought conditions above 80 and oversold conditions below 20,

The CMF emphasizes volume to reflect the accumulation or distribution of an asset, directly measuring market sentiment through money flow. Meanwhile, the MFI combines both price and volume, focusing more on the typical price to identify overbought and oversold market conditions.

Last, the CMF is used to confirm trends and identify divergences between volume and price movements, providing insights into the strength behind price trends. The MFI, as a momentum oscillator, helps traders time trades by identifying potential reversal points based on overbought or oversold conditions, leveraging both price and volume data.

Note

CMF and MFI can be used together for trading decisions. Because of their differences, their complementary nature can enhance trading signals.

Key Similarities

Although the calculations are different, both the CMF and MFI incorporate volume and price data into their calculations. This integration allows both indicators to provide insights into the buying and selling pressure within the market, meaning investors can pick up some of the underlying strength or weakness of price movements.

Both indicators can serve as tools for gauging market sentiment. CMF measures the flow of money into and out of an asset to determine whether there is accumulation or distribution, while MFI uses price and volume changes to identify overbought or oversold conditions. In both cases, investors can rely on the metric to make investment decisions.

Traders use both CMF and MFI to spot divergences between the indicator and the price of the asset. Such divergences can be strong signals of potential reversals in price trends In addition, both are employed to confirm existing trends. A positive CMF value supports a bullish trend, while a negative value supports a bearish trend. Similarly, MFI values above 50 generally support bullish conditions, while values below 50 support bearish conditions.

What Does a Positive CMF Value Indicate?

A positive CMF value indicates that there is buying pressure, suggesting that the asset is being accumulated. This typically signifies bullish market conditions, as the closing prices are closer to the high prices of the period.

How Can CMF Be Used to Confirm Trends?

CMF can be used to confirm trends by comparing its direction with the price movement of the asset. A rising CMF value that is positive supports a bullish trend, while a falling CMF value that is negative supports a bearish trend. Consistency between CMF and price trends strengthens the trend confirmation.

What Do MFI Values Above 80 Indicate?

MFI values above 80 typically indicate overbought conditions. This suggests that the asset may be overvalued and could be due for a price correction or a potential sell-off, signaling a potential sell opportunity.

How Does MFI Differ From the Relative Strength Index (RSI)?

While both MFI and RSI are momentum oscillators, MFI incorporates volume data in addition to price, whereas RSI is based solely on price changes. This inclusion of volume in MFI makes it a more comprehensive indicator of buying and selling pressure compared to RSI.

The Bottom Line

The CMF measures market sentiment by analyzing the accumulation and distribution of an asset through a volume-weighted approach, providing insights into buying and selling pressure over a specified period. On the other hand, the MFI combines price and volume data to identify overbought and oversold conditions, functioning as a momentum oscillator that helps in timing potential reversals.

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