Technical Indicators: Money Flow
Money Flow on bigcharts.com is a bit different from the Money Flow that most people look at. Typically, when talking about money flow we are talking about the money flow index chart which is scaled like RSI (0 to 100) with the same overbought and oversold levels. The money flow index is essentially a volume weighted version of RSI (price ups multiplied by volume and added and price downs multiplied by volume added for a given period). If you’re confused by this, got back to the relative strength index tutorial and take a look at the formula for calculating RSI and it should be clearer.
While the money flow index could be looked at as a volume weighted RSI, money flow as it is represented on bigcharts.com might be better thought of as a price weighted on-balance volume. Take a look at the chart below. Below price and volume, I have graphed OBV then money flow.
Money flow is created by averaging the price of each day’s high, low, and close then multiplying by volume. This is added to the running total if the price is up and subtracted if the price is down. As you can see, the chart of money flow looks very much like a slightly more pronounced OBV. The use of money flow is very similar to that of OBV. We are looking for the money flow chart to confirm price trends. More often than not, money flow will begin flattening or reversing prior to a price trend and this is used in hopes of timing your entries and exits. If you see a potential uptrend and money flow is moving in a divergent manner, be wary. This is a signal that interest in the stop has begun tapering off despite prices moving upwards.
As far as using money flow in place of OBV in your analysis, I’m not necessarily sure what to think of it. Statistically speaking it is nice to have as little double counting as possible. Since money flow takes price into account and, since you are a smart and savvy investor, you are likely using several price dependent indicators already, it is nice to have something like OBV or Volume+ as a statistic not necessarily sensitive to the magnitude of price movements. Money Flow, given it’s more pronounced development due to the weighting of volume movements, does provide a more readable graph than OBV at times and given that it rarely diverges with OBV, my opinion would be that it would be an acceptable substitue for OBV in your analysis regimen.
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