Volume Based Technical Analysis
Money Flow Analysis
Money Flow is one of the volume parameters that show whether money is coming into a security (stock) or leaving the security. A positive money flow means that investors are interested in buying a particular stock, investing in an index (market sector) or the whole market. In the case of positive money flow, new investors are coming and causing buying demand to grow and those investors who have already bought are not in a rush to sell. Conversely, a negative money flow indicates that investors (traders) are leaving the market and that their number is greater than the number of buying traders and, thus, stock, index or market moves down.
Examples of indicators that help to monitor Money Flow in technical analysis are SBV Oscillator, Money Flow Index (MFI), Chaikin Money Flow, and Chaikin Oscillator, etc. As a rule, almost all volume-based technical indicators reveal money flow - it could be tied to an indicator direction. If a volume based technical indicators moves down, it would indicate negative money flow, whereas a volume indicator that is moving up would indicate positive money flow.
Some volume indicators (such as SBV Oscillator, Chaikin money Flow, and Chaikin Oscillator, etc) will indicate a positive money flow even with a declining indicator, as long as it remains positive (above the zero-center line) and will indicate a negative money flow when the indicator is below zero. Overall, these indicators (Chaikin Money Flow, SBV Oscillator, etc) could be described by one of the conditions below:
- it is positive and moves up - this means that traders are buying, and more and more new traders are attracted by the growing stock, index or market price and are becoming buyers. Usually, this indicates that the buying interest will continue to push this stock/index/market up;
- it is positive (above zero), but has started to move down - this indicates that the period of growing greedy buying is over and those traders who bought earlier have started to sell. It still indicates that the number of buying traders is greater than the number of selling traders and that we still may see up-movement. However, at the same time, it tells us that the supply/demand balance has started to shift and, if this tendency continues, we may see bearish traders taking over from the bullish investors and, as a result, a downturn in the trend;
- it is negative and moves down - this means that traders are selling, and that the number of selling traders is growing. Usually, this indicates that the bearish traders will continue to push this stock/index/market down;
- it is negative (below zero), but has started to move up - this indicates that period of panic selling is over and that the number of selling traders has started to decline. It indicates that those traders who sold previously and had left the market are now attracted by low priced stocks and have started to return. This may reverse the trend upward.
Below is the S&P 500 chart that shows money flow based on the SBV Oscillator, MFI, Chaikin Money Flow and Chaikin Oscillator.
Chart #1: S&P 500 chart with technical indicators showing Money Flow
When it comes to analysis of the money flow, the most common way of generating signals is by defining money flow reversal points. Money Flow indicators are leading indicators that are used to predict possible future changes in a price trend. Thus, if the SBV started to decline after being in an advance it would signal that the number of buying traders has started to decline and that this may lead to a correction. Conversely, when the SBV starts to move up, it would signal that the number of selling traders has become smaller and that this may lead to a reversal and recovery.
Still, a change in the money flow does not guarantee that you will see a reversal. It tells us that the stock (when stock volume is analyzed), index (when index volume is analyzed) or market (when exchange volume is analyzed) has become predisposed to a change in a price trend. In some cases, we may see only a short-lived change in a trend. In this case, using a more conservative approach of waiting for a stronger and stable change in the money flow (as in our "Simple Trading System" examples we wait until SBV declines to plus 20% or advances to minus 20%) might be recommended. Alternatively, you could use other indicators to confirm the trend changes.
You have to look at money flow indicators as indicators of the supply/demand balance. For instance, low negative SBV Oscillator readings indicate that the number of selling traders is greater than the number of buying traders. In contrast, high positive SBV Oscillator readings tell us that the demand of buying traders is dominant. Money flow trend shows whether supply or demand is growing, how strongly it is growing and who (suppliers or demanders) are dominant in the market.
NEXT: Volume Accumulation
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