What is Money Flow
Let me walk you through what money flow really means in trading. You calculate it by taking the average of a stock's high, low, and closing prices for the day, then multiplying that by the daily trading volume. Once you have that figure, compare it to the previous day's result to see if the money flow is positive or negative. If it's positive, expect prices to potentially head higher; if negative, they might be gearing up for a drop.
Here's a straightforward example showing negative money flow from Day One to Day Two. On Day One, the high was $65, low $60, close $63, with 500,000 shares traded, giving a money flow of $31,333,333. On Day Two, high $66, low $58, close $65, with 300,000 shares, resulting in $18,900,000. That drop signals negative flow.
Breaking Down Money Flow
Positive money flow happens when shares are bought at a higher price, known as an uptick, showing buyers are willing to pay more. Negative money flow kicks in on a downtick, where the next trade is at a lower price. If throughout the day more shares move on upticks than downticks, net money flow turns positive—investors are paying a premium, which is a bullish sign.
Keep an eye on this: even if a stock's price is rising but money flow is negative, it could foreshadow a reversal. You should monitor money flow because volume often leads price action, helping you spot trading opportunities early.
Money Flow and Money Flow Indicators
When incorporating money flow into your strategy, many traders turn to the Chaikin money flow oscillator. Developed by Marc Chaikin, it measures buying and selling pressure like other flow indicators but adds two exponential moving averages to track momentum, similar to the MACD.
Another tool you'll find useful is the money flow index (MFI), which looks at both price and volume. It calculates the ratio of net positive to net negative money flow and plots it as a line. Compare this to the security's price to spot overbought conditions above 80 or oversold below 20.
Remember, don't rely on money flow indicators alone—pair them with other technical tools to boost accuracy and cut down on false signals.
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