What is Money Flow — and how traders use it
Money flow is a price-and-volume construct traders use to judge whether buying or selling pressure is dominating a market. The basic idea: combine price (high, low and close) with trading volume to create a daily “money flow” value. Comparing those values over time — or aggregating them into indicators such as the Money Flow Index (MFI) or Chaikin Money Flow (CMF) — helps identify strength (accumulation) or weakness (distribution) that may lead prices to rise or fall. (Source: Investopedia; Chaikin Analytics.)
How raw Money Flow is calculated
1) Typical Price (TP) for a day:
TP = (High + Low + Close) / 3
2) Raw Money Flow (also called Money Flow Volume) for that day:
Raw MF = Typical Price × Volume
3) Sign (positive/negative) for that day:
– If today’s Typical Price > yesterday’s Typical Price → the day’s Raw MF is treated as Positive Money Flow.
– If today’s Typical Price 80 often signals overbought.
– MFI 0 suggests net accumulation (buying pressure).
– CMF PrevTypicalPrice else NegativeMF if TypicalPrice 80 = overbought (watch for reversal), <20 = oversold (watch for bounce).
Limitations and pitfalls
– Volume dependence: money-flow indicators assume volume data is reliable. For thinly traded instruments, or when volume reporting is inconsistent (some OTC markets, certain international exchanges), readings can be noisy.
– False signals: MFI/CMF can give false divergences during trending markets — price may continue despite apparent divergence.
– Lookback sensitivity: indicator sensitivity depends on the chosen period. Shorter windows = more signals (more noise); longer windows = fewer signals (lag).
– Not a standalone tool: always combine with price action, support/resistance, trend context and risk management.
– Corporate events and off-exchange trades can distort volume-based metrics.
Best practices and tips
– Use MFI for oscillatory markets and CMF for detecting accumulation/distribution in trending contexts.
– Confirm money-flow signals with price structure (trendlines, S/R) and a secondary indicator (RSI, MACD, volume bars).
– Adjust periods and thresholds and backtest on the instrument/timeframe you trade.
– Pay attention to volume spikes and gaps — they often precede big moves and can skew short-window indicators.
– Treat zero/80/20 as guidelines, not absolute rules — interpret in context.
References and further reading
– Investopedia, “Money Flow” — overview and formulas (source of definitions and examples): https://www.investopedia.com/terms/m/moneyflow.asp
– Chaikin Analytics, “Chaikin Money Flow” — background and CMF formula insights.
If you’d like, I can:
– produce a downloadable Excel template that computes Typical Price, Raw MF, MFI (14-day) and CMF (21-day) from a price/volume CSV; or
– show example trades (entry/exit) using MFI and CMF on a specific stock and timeframe. Which would you prefer?