Money Flow

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Money Flow: Definition, Calculation, and Uses in Trading

What is money flow?

Money flow quantifies the dollar value of trading activity for a security by combining price and volume. It helps traders assess whether buying or selling pressure dominated a period and can indicate potential price direction.

How to calculate money flow

  1. Calculate the Typical Price (TP):

  2. TP = (High + Low + Close) / 3

  3. Calculate Raw Money Flow:

  4. Raw Money Flow = TP × Volume

  5. Determine sign (positive or negative):

  6. If today’s TP > yesterday’s TP → today’s Raw Money Flow is positive.
  7. If today’s TP < yesterday’s TP → today’s Raw Money Flow is negative.

Example

Day One
* High = $65, Low = $60, Close = $63, Volume = 500,000
TP = (65 + 60 + 63) / 3 = 62.67
 Raw Money Flow = 62.67 × 500,000 = $31,333,333 (positive by definition for the first period)

Day Two
* High = $66, Low = $58, Close = $65, Volume = 300,000
TP = (66 + 58 + 65) / 3 = 63.00
 Raw Money Flow = 63.00 × 300,000 = $18,900,000

Comparing the two days shows declining money flow from Day One to Day Two, indicating weaker net buying pressure even though price rose.

How traders use money flow

  • Leading indicator: Volume often precedes price. Increasing positive money flow can foreshadow price gains; increasing negative money flow can precede declines.
  • Divergence signals: Price rising while money flow falls may signal a pending reversal (weakening buying pressure). Conversely, price falling while money flow rises can indicate potential upside.
  • Confirming moves: Traders typically use money flow together with price patterns and other indicators to reduce false signals.

Common money-flow indicators

  • Money Flow Index (MFI)
  • MFI combines price and volume over N periods.
  • Money Flow Ratio = (Sum of Positive Money Flow over N) / (Sum of Negative Money Flow over N)
  • MFI = 100 − (100 / (1 + Money Flow Ratio))
  • Interpretation: MFI > 80 often signals overbought; MFI < 20 often signals oversold.
  • Chaikin indicators
  • Marc Chaikin developed volume/price indicators (Chaikin Money Flow and related measures) to quantify accumulation/distribution and momentum.
  • These indicators use price range and volume to assess buying vs. selling pressure over a lookback period.

Practical considerations and cautions

  • Always combine money flow with other technical tools (trend analysis, moving averages, momentum indicators) to confirm signals.
  • Volume quality matters: abnormal spikes from news, block trades, or low-liquidity markets can distort money-flow readings.
  • Choose an appropriate lookback period for indicators (shorter for responsive signals, longer for smoother, more reliable signals).
  • No indicator is perfect—manage risk with stops, position sizing, and confirmation rules.

Key takeaways

  • Money flow = typical price × volume; its sign depends on whether typical price rose or fell versus the prior period.
  • It helps reveal whether buying or selling pressure dominates and can lead price action.
  • Use Money Flow Index, Chaikin-style indicators, and other tools together to improve decision-making and reduce false signals.