Money Flow Study

By Samantha Baltodano

TL;DR:

The Money Flow study is a measure of the inflows and outflows of money for a particular stock. Money Flow itself is not an indicator, but there are various Money Flow indicators available like the Chaikin Money Flow oscillator and the Money Flow Index (MFI). Investors monitor Money Flow because trading volume is typically considered to lead price, which could help identify early trading opportunities.

What Is Money Flow Study?

The Money Flow study illustrates the inflows and outflows of cash for a particular stock. 

Money flow is calculated by finding the Typical Price value and multiplying by the daily volume. Comparing that result with the number for the previous day tells traders whether money flow was positive or negative for the current day.

Positive money flow indicates that prices are likely to move higher, while negative money flow suggests prices are about to fall. 

The below example shows negative money flow between Day One and Day Two:

Day One:

High: $65

Low: $60

Close: $63

Daily Volume: 500,000 Shares

Typical Price = ($65+$60+$63) / 3

Money Flow = 500,000 × Typical Price = $31,333,333

​

Day Two:

High: $66

Low: $58

Close: $65

Daily Volume: 300,000 Shares

Typical Price = ($66+$58+$65) / 3

Money Flow = 300,000 × Typical Price = $18,900,000

​

Break Down

Positive Money Flow occurs when a stock is purchased at a higher price (an uptick). Negative Money Flow occurs when the next trade is purchased at a lower price (a downtick).

If more shares were bought throughout the day on the uptick than the downtick, net Money Flow is positive because more investors were willing to pay a premium for the stock. 

However, if Money Flow is negative when a stock's price is rising, this could indicate a pending price reversal. 

Investors monitor Money Flow because trading volume is typically considered to lead price, which could help identify early trading opportunities.

Money Flow and Money Flow Indicators

Money Flow itself is not an indicator, rather a mathematical function used to construct other indicators. Money Flow indicators include the Chaikin Money Flow oscillator and the Money Flow Index (MFI).

Many traders use the Chaikin Money Flow oscillator when they want to incorporate Money Flow into their trading decisions. The indicator produces values for buying and selling pressure like other Money Flow indicators but also uses two exponential moving averages to determine momentum in a similar way that the moving average convergence divergence (MACD) indicator does.

Traders also frequently use the Money Flow Index (MFI) when they want to analyze price and volume. This indicator divides the net positive Money Flow by the net negative Money Flow and plots the value as a line that traders can compare to the price of a security to identify overbought and oversold levels. If the indicator is above 80, prices are considered overbought. A value below 20 indicates oversold conditions.

Other technical indicators can be used in conjunction with Money Flow indicators to improve their effectiveness and reduce false trading signals.

Money Flow is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.

Like what you read? Check out the rest of our content!