Businessmen need to take hundreds of factors into account before they can make business decisions. Missing out a significant factor from the analysis could prove to be devastating because the same factor you have neglected could make the biggest impact in changing the whole scenario. You will have to take every step by looking at the indicators or otherwise you will get into trouble. Some of the most common indicators used to measure money flow are as follows:

Money Flow Index

Money flow index takes both price and volume into account. In MFI, money flow is positive when buying pressure rises and is on the negative side when selling pressure falls. The ratio of negative to positive value is calculated with respect to time period, i.e. on a yearly basis, using a formula. The money flow index ranges from 0 to 100. MFI is more efficient when it comes to finding out about price boundaries and identifying sudden trend changes and opposite price movements.

Money flow is positive when typical price rises from one period to the next period and it is negative when typical price comes down from one period to another. The money flow index is treated in the same way as RSI. Volume sets both of them apart. The MFI leads prices and with addition of volume, lead time increases. Analysts can easily view the overbought and oversold levels to tell you price boundaries and high and low trends can be used to predict reversals. An MFI value higher than 80 is considered overbought and MFI value below 20 is considered oversold.

You should not rely on MFI as a sole indicator and make decisions based only on the results MFI gives you. It is highly recommended you take multiple indicators into account and use a hybrid approach than only relying on any one indicator. Looking at the situation from different perspective (indicators) will put you in a better position to make the right decision especially when it is about your business and money.

Relative Strength Index

Another momentum metrics used to measure the fluctuations in price movements and speed at which it changes. Similar to MFI, RSI also has the range from 0 to 100. A value higher than 70 is taken as overbought and a value below 30 is considered oversold. RSI are best if you want to know about the general trend in the market. It uses similar techniques to exponential moving averages to calculate the value. The accuracy of value increases over a longer period of time.

The default period value is 14 but it can be increased to decrease sensitivity or brought down to boost sensitivity. The overbought and oversold criteria can also be readjusted by looking at the analytical requirements. Divergence could mislead you if you are looking at the strong trend. Failure swings accurately predicts imminent reversal and are independent of price action. It takes signals from RSI and doesn’t take divergence into consideration.

On Balance Volume

On balance volume treats buying and selling pressures cumulatively unlike other indicators which consider them independently. It includes volume on up days and excludes volume on down days. It is one of the oldest indicators used for measuring positive and negative volume flow. Want to confirm price trends or want to predict price movements? Use on balance volume for such situations. The value of OBV increases when volume on up days surpasses volume on down days. The value decreases when volume on down days is higher than that on up days.

Increasing value of OBV indicates positive volume pressure that results in higher prices. Declining value of OBV shows negative volume pressure that can result in lower prices. You must pay more attention to characteristics of OBV line. OBV value is normally based on closing prices. Analyze closing prices when finding support or resistance breaks or divergences. Rise in volume will also cause an extreme move which will take some time to settle and come back to normal.

The bottom-line is that most indicators work well in specific situations, so it is better to use a combination of these indicators to make the right decisions.

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MKTPlace is a leading digital and social media platform for traders and investors. MKTPlace offers premiere resources for trading and investing education, digital resources for personal finance, news about IoT, AI, Blockchain, Business, market analysis and education resources and guides.

When you are performing a technical analysis, you need to focus on various indicators and what they say. Closely analyze the indicators and the bigger picture will be in front of you. Same is the case with the asset trading business. There are many indicators you must consider when trading securities and one of those indicators is the Money Flow Index (MFI).

Money Flow Index

The money flow index is an indicator which shows the strength of money flowing in and out of asset trading. It is interlinked with RSI (Relative Strength Index). The main difference between the two is that RSI only considers prices while money flow index (MFI) takes both price and volume into account. Its range is from 0 to 100.

All the bars whose average price is more than or less than the previous bar are considered while calculating the MFI. Index values are used to plot the money flow. The price and volume nature gives more in-depth information from different angles which could help in determining the progress towards your goal. The money flow index can show lot of fluctuation and highlights overbuying and overselling in an effective way.

Overbought and Oversold

On a scale from 0 to 100, a value of 20 or less is considered oversold and a value of 80 or above is considered overbought. This is also known as accumulation and distribution. It is used to indicate the momentum and direction of the market. You will have to add the distribution and accumulation values of all the trading days and divide it by the number of days you want to find MFI of.

Calculations

Firstly, determine the actual price by using the following formula:

Price = (High + Low + Close)/3

Next, calculate the money flow by following formula:

Raw money flow = Price × Volume

Specify the number of days you are trying to find the money flow for. For example, you want to find money flow for 20 days. Now, it is time to calculate the ratio of money flow by using the following formula:

Money flow ratio = (20 days’ accumulation)/(20 days’ distribution)

Accumulation and distribution can also be replaced with positive and negative money flow respectively in the above formula.

The final step is to find the money flow index. The formula to find the money flow index is:

Money Flow Index = 100 – [100 / (1+Money flow ratio)]

Many traders are looking to take advantage of opportunity when price and money flow index move in opposite directions. This brings about a significant change in the market. Divergence of these two factors, price and money flow index, can be beneficial or can also be disastrous depending on the situation you are in. It is a little risky but if you consider some other factors then you will end up on the safe side.

Other Factors

It would be much better for you if you consider factors other than price and volume because you will be able to see the bigger picture and can easily make the right decision. If there are large gaps in price action, then there is some problem because calculation of money flow is done by taking mid-points of price action into account. If there is a large gap, then it means some mid-points are missing and the complete calculation becomes suspicious and ambiguous.

If the mid-points are missing, the results will be disturbed. It is highly recommended to verify your results through other indicators and don’t depend only on price and money flow. You can also check out exponential moving averages and moving average convergence and divergence which are more accurate as compared to money flow index indicator.

It can give early warning signs for a changing currency trend so you can be prepared beforehand to tackle such issues and save yourself from losses. The STC indicator can also be used but it was primarily developed for the currency trading. The STC indicator reduces the risk of false signals significantly. With computers at your disposal, you can quickly judge the accuracy and reliability of prices thanks to trading software. Be aware of the latest indicators because they might be more efficient as compared to older methods.

Market Place

MKTPlace is a leading digital and social media platform for traders and investors. MKTPlace offers premiere resources for trading and investing education, digital resources for personal finance, news about IoT, AI, Blockchain, Business, market analysis and education resources and guides.