Money Flow

Money Flow

Money flow in technical analysis is typical price multiplied by volume, a kind of approximation to the dollar value of a day’s trading.

Money flow index (MFI) is an oscillator calculated over an N-day period, ranging from 0 to 100, showing money flow on up days as a percentage of the total of up and down days.

The calculations are as follows. The typical price for each day is the average of high, low and close,

Money flow is the product of typical price and the volume on that day.

Totals of the money flow amounts over the given N days are then formed. Positive money flow is the total for those days where the typical price is higher than the previous day’s typical price, and negative money flow where below. (If typical price is unchanged then that day is discarded.) A money ratio is then formed

From which a money flow index ranging from 0 to 100 is formed,

This can be expressed equivalently as follows. This form makes it clearer how the MFI is a percentage,

MFI is used as an oscillator. A value of 80 is generally considered overbought, or a value of 20 oversold. Divergence between MFI and price action are also considered significant, for instance if price makes a new rally high but the MFI high is less than its previous high then that may indicate a weak advance, likely to reverse.

It will be noted the MFI is constructed in a similar fashion to the relative strength index. Both look at up days against total up plus down days, but the scale, ie. what is accumulated on those days, is volume (or dollar volume approximation rather) for the MFI, as opposed to price change amounts for the RSI.

It’s important to be clear about what “money flow” means. It refers to dollar volume, ie. the total value of shares traded. Sometimes finance commentators speak of money “flowing into” a stock, but that expression only refers to the enthusiasm of buyers (obviously there’s never any net money in or out, because for every buyer there’s a seller of the same amount).

For the purposes of the MFI, “money flow”, ie. dollar volume, on an up day is taken to represent the enthusiasm of buyers, and on a down day to represent the enthusiasm of sellers. An excessive proportion in one direction or the other is interpreted as an extreme, likely to result in a price reversal.

Copyright (c)  2006  TradingStocks.NET Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts. A copy of the license is included in the section entitled “GNU Free Documentation License”.

An affiliate of elliotwave.com – Investing and Trading in the Stock Market