If you plot the Chaikin money flow or CMF on trading view, you will notice that it comes with one line that oscillates between positive one and negative one. Chaikin money flow is used to find the direction of a trend and the buying and selling pressure.

 

It was created by Marc Chaikin who is a stock trader and has created many other indicators, one of them is the Accumulation Distribution. Since chaikin money uses volume to calculate its values, it will work better on the stock market where volume is more readable.

 

When the Chaikin money flow is below the zero line, it indicates a down trend or a selling pressure, and when the Chaikin money flow is above the zero line, it means there is a buying pressure.

 

So here’s how the Chaikin money flow trading strategy works.

 

When the Chaikin money flow line crosses above the zero line, it’s a buy signal.

 

Similarly, when the Chaikin money flow line crosses below the zero line, it’s a sell signal.

 

Also, it is a good idea to use it with a 200 period moving average to find the end of a pullback in a trend.

 

So here’s how the complete chaikin money flow trading strategy goes.

 

Buy when the Chaikin money flow line crosses above the zero line if price is above the 200 period moving average. Price above the 200 period moving average indicates an uptrend. Set the stop loss below the pullback.

 

And sell when the Chaikin money flow line crosses below the zero line if price is below the 200 period moving average. Price below the 200 period moving average indicates a down trend. Your stop loss goes above the pullback.

 

Here, price is above the 200 period moving average, and the CMF is crossing above the zero line. Your entry is at the closing price of the first candle that closes above the zero line.

 

And here, price is below the 200 moving average, and the CMF is crossing below the zero line. The entry is at the closing price of the first candle that crosses below the zero line.

 

Now anyone can show few winning trades, but will the Chaikin money flow work in the long run. Can you make money with it? To find out, I tested the Chaikin money flow trading strategy 100 times, and here’s what happened.

 

Number 1. At the beginning, Chaikin money flow trading strategy gave a lot of winning trades in a row. If you look at the profit graph in the Trading Rush App, you will notice that it is going straight up. I have tested many different trading strategies on the Trading Rush channel, and only few indicators like the MACD and Donchian Channels, have given similar numbers of winning trades at the start. Now since the Chaikin money flow is giving multiple winning trades in a row, does this mean the Chaikin money flow is as good as the MACD strategy? Well, when I was backtesting this strategy, I noticed that it gives a lot of entry signals in a short period of time. At the start when the price was trending, the Chaikin money flow indicator gave a lot of winning trades in a row. But when the market went sideways, it gave multiple false signals in a row. This problem can be easily fixed by using the alligator indicator. Usually, when the mouth of the alligator is closed, it means that the trend is moving sideways. I have made a detailed video on the alligator indicator, check it out to learn more. Also, check out Official Trading Rush App, it has a backtester feature that you can use while backtesting your trading strategy. It will calculate win rate, profit graph and other data in just one click. Download it from the play store or using the link in the description. 

 

Number 2. Chaikin money flow strategy gives many entry signals in a short period of time, and those are not always at the end of a pullback. Sometimes, the Chaikin money flow indicator gives entry signals even when the market is strongly moving in almost a straight line. Because of this, setting a stop loss above or below the pullback becomes difficult. So it is a good idea to use other stop loss indicators like the ATR or parabolic sar with this indicator. Here, we are using the Chaikin money flow indicator to find entry signals, but you can also use it as an exit signal generator. Lets say you enter a long trade with the MACD strategy. You can exit the trade when the Chaikin Money Flow crosses below the zero line.

 

Number 3. As you can see in the Trading Rush app, the profit graph went up at the start and gave multiple winning trades in a row, but then went down and gave multiple losing trades in a row. Profit and losses are not consistent with this strategy. But this strategy has a big room for improvement, because most of the losing trades it gave were in the range market. If you can identify the range market, the win rate of this strategy will significantly go up. Alligator indicator will get the job done as mentioned before.

 

Number 4. While backtesting, I noticed that when Chaikin gives a false short entry signal, in other words when the price is moving down in almost a straight line and there is no proper pullback to set the stop loss, the Chaikin money flow barely crosses above the zero line. Similar thing applies to the false buy setups. So you can improve the win rate of the Chaikin money flow indicator strategy, and get a better stop loss target distance, by only taking long trades when the CMF line goes way below the zero line, and by only taking short trades when the CMF line goes way above the zero line. If you are a stock trader, just remember that this indicator doesn’t take gap opens into consideration. So manage trades accordingly because the CMF value sometimes won’t be accurate after a gap open.

 

So after testing the Chaikin money trading strategy 100 times, I found out that the win rate of the Chaikin money flow strategy is not that good, but has a lot of room for improvement. I got a win rate of approximately 43 percent with a 1.5 to 1 reward risk ratio and in the Trading Rush App, you can see that it made a profit, but the profit graph doesn’t look that good. In other words, the profits don’t look that consistent when compared with other trading strategies we have tested on this channel. It gave 10 winning trades in a row, but then lost 9 trades in a row. Overall, Chaikin money flow is a great indicator if you just want to analyze the strength of the trend and the direction of the trend. When it comes to entry signals, it gives a lot of false entry signals. But if you have an eye for correctly spotting the range markets, this indicator can work excellently in the strong trends.