Indicator Money Moves

Description

The “Money Flow” in the context of financial markets refers to the movement of capital into and out of securities. It’s a concept that encompasses several indicators designed to quantify this movement and glean insights into market sentiment and momentum. 

1. Typical Price: This is the average of a period’s high, low, and closing prices: (High + Low + Close) / 3.
2. Raw Money Flow: Calculated by multiplying the Typical Price by the Volume.
3. Positive and Negative Money Flow: If the Typical Price is higher than the previous period’s Typical Price, it’s considered Positive Money Flow. If lower, it’s Negative Money Flow.
4. Money Flow Ratio: This is the ratio of Positive Money Flow to Negative Money Flow over a specified number of periods (usually 14 periods by default).
5. Money Flow Index: Calculated using the Money Flow Ratio, the MFI is then plotted as an oscillator between 0 and 100. 

• Overbought/Oversold Conditions: A high MFI reading (typically above 80) indicates overbought conditions, suggesting the security may be overvalued and a price correction could be imminent. A low reading (typically below 20) suggests oversold conditions, potentially signaling an undervalued asset and a potential price reversal. However, in strong trends, the MFI can remain in overbought or oversold territory for extended periods, so these signals should be confirmed with other indicators.
• Divergences: When the price and the MFI move in opposite directions, it suggests a potential trend reversal.
  • Bearish Divergence: Price makes higher highs, but the MFI makes lower highs, indicating weakening buying pressure and a potential downside reversal.
  • Bullish Divergence: Price makes lower lows, but the MFI makes higher lows, suggesting weakening selling pressure and a potential upside reversal.
• Trend Confirmation: When the MFI moves in the same direction as the asset’s price, it can confirm the strength of the trend. 

• OBV: Adds the volume of periods with rising prices and subtracts the volume of periods with falling prices, treating all price changes equally regardless of magnitude.
• MFI: Accounts for the magnitude of price changes by multiplying the volume of periods by their price range, making a period with a larger price movement more impactful than a smaller one.