Friday, February 24, 2012 1:22:52 PM
Technical Analysis-- Introduction to Money Flow by Jimmenknee
Introduction to Money Flow-- Technical Analysis
Momentum and Trending Indicators are extremely useful to help gauge the direction and strength of a stock movement. However,trading activity at its core is the ongoing battle over share supply and demand.
Given the onset of the financial crunch, it appears that more companies are choosing to tap into their equity more frequently. More so now, but even under “normal” conditions, Money Flow (or Volume)Indicators play a role in helping to understand that buying/selling relationship.
The following are the basics of charting Money Flow indicators and how to utilize them to spot irregularities in buying and selling pressures.
Daily Chart Indicators:
On Balance Volume (OBV): OBV is a simple indicator that adds a period's volume when the close is up and subtracts the period's volume when the close is down. Accumulative total of the volume additions and subtractions forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergence or confirmation.
Accumulation/Distribution Line (A/D): A momentum indicator that relates price changes with volume. It relates the closing price to the range of prices (High to Low). The closer the close is to the high, the more volume is added to the cumulative total.
Chaikin Oscillator (ChiOsc): This is a moving average of the A/D. It is created by subtracting a 10period exponential moving average of the accumulation/distribution line from a 3 period exponential average of it.
Chaikin Money Flow (CMF): An oscillator that helps signal if a stock is undergoing accumulation or distribution. It is calculated from the daily readings of the A/D.The CMF is unlike a momentum oscillator in that it is not influenced by the daily price change. Instead, the indicator focuses on the location of the close relative to the range for the period (daily or weekly).
Money Flow Index (MFI): A volume-weighted momentum indicator that measures the strength of money flowing in and out of a security. It compares "positive money flow" to "negative money flow" to create an indicator that can be compared to price in order to identify the strength or weakness of a trend.
Intraday Chart Indicators:
Volume+: The Volume+ indicator identifies by colored bars when the trading volume contributed to a gain in price and when the trading volume was associated with a loss in price. The colors are labeled in the legend above the indicator. In addition to the color coding, the Volume+ indicator displays a symbol's50-day average volume as a reference point.
Money Flow: The Money Flow indicator attempts to measure the amount of money buying a stock vs. the amount of money selling a stock. It does this by assuming that when a stock closes higher than its open, all volume associated with that trading period results from buyers. It further assumes that when a stock closes lower than its open, all volume associated withthat trading period results from sellers. Although these assumptions are overly simplistic, money flow can be a useful indicator when analyzing the general buying and selling pressure on a stock.
Volume Accumulation: The Volume Accumulation indicator, is a modification of the traditional OBV indicator. Instead of assigning all the period's volume to either buyers or sellers, the Volume Accumulator uses a proportional amount of volume based on the relationship between the closing price and its intra-period mean price. In effect, the indicator is measuring shades of gray that traditional volume indicators like OBV miss.However, if prices close at the period's high or low, all volume forthat period will be assigned accordingly, regardless of the relationship to the intra-period mean price.Movement of the oscillator above the zero line measures buying pressure, while movement below the zero line measures selling pressure.
General Terms:
Divergence: A situation that occurs when two lines on a chart move in opposite directions vertically. There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher while the stock is declining. A negative divergence occurs when the indicator moves lower while the stock is rising.
Whipsaw: A whipsaw occurs when a buy or sell signal is reversed in a short time. Volatile markets and sensitive indicators can cause whipsaws.
Author's Interpretation: CMF and A/D line represent retail buying/sentiment— when the overall trend is down you can interpret it as Retail Buyers beginning to lose faith in the movement.
ChiOsc and MFI represent Sellers affect on “normal” trading. When they are providing more supply than the demand can handle (MFI), money momentum is degraded/stopped (ChiOsc). ChiOsc will tell you when the run is losing momentum and MFI will tell you when the demand fades but the sellers remain. When the ChiOsc collapses along with a down trending MFI against flat or uptrending OBV, A/D and CMF, it can be interpreted as retailers trying to "catch a falling knife."
Given that, for momentum generated runs, the emphasis is placed on the average price to qualify/quantify supply/demand battles. Both CMF and MFI are tracked in multiple periods-- 3 periods for short-term trying to quantify the daytrader, flipper and heavy sellers and 21 periods to trend based on a typical month.
In the example below, periods 1 and 2 show normal buying/selling into a pop. Period 3 shows ChiOsc divergence during basing, suggesting a load into a pending run. Period 4 shows the selling shift as well as the Retail attempt to support price as momentum collapsed-- ominous foreboding going into Friday.
In the next example, the "devil in the details" detection can be more readily seen on an Intraday chart. Both the Money Flow and Volume Accumulation indicators whipsawed for the first 1 1/2 hours on Thursday before the ultimate crash during the 1:45 time block.
Introduction to Money Flow-- Technical Analysis
Momentum and Trending Indicators are extremely useful to help gauge the direction and strength of a stock movement. However,trading activity at its core is the ongoing battle over share supply and demand.
Given the onset of the financial crunch, it appears that more companies are choosing to tap into their equity more frequently. More so now, but even under “normal” conditions, Money Flow (or Volume)Indicators play a role in helping to understand that buying/selling relationship.
The following are the basics of charting Money Flow indicators and how to utilize them to spot irregularities in buying and selling pressures.
Daily Chart Indicators:
On Balance Volume (OBV): OBV is a simple indicator that adds a period's volume when the close is up and subtracts the period's volume when the close is down. Accumulative total of the volume additions and subtractions forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergence or confirmation.
Accumulation/Distribution Line (A/D): A momentum indicator that relates price changes with volume. It relates the closing price to the range of prices (High to Low). The closer the close is to the high, the more volume is added to the cumulative total.
Chaikin Oscillator (ChiOsc): This is a moving average of the A/D. It is created by subtracting a 10period exponential moving average of the accumulation/distribution line from a 3 period exponential average of it.
Chaikin Money Flow (CMF): An oscillator that helps signal if a stock is undergoing accumulation or distribution. It is calculated from the daily readings of the A/D.The CMF is unlike a momentum oscillator in that it is not influenced by the daily price change. Instead, the indicator focuses on the location of the close relative to the range for the period (daily or weekly).
Money Flow Index (MFI): A volume-weighted momentum indicator that measures the strength of money flowing in and out of a security. It compares "positive money flow" to "negative money flow" to create an indicator that can be compared to price in order to identify the strength or weakness of a trend.
Intraday Chart Indicators:
Volume+: The Volume+ indicator identifies by colored bars when the trading volume contributed to a gain in price and when the trading volume was associated with a loss in price. The colors are labeled in the legend above the indicator. In addition to the color coding, the Volume+ indicator displays a symbol's50-day average volume as a reference point.
Money Flow: The Money Flow indicator attempts to measure the amount of money buying a stock vs. the amount of money selling a stock. It does this by assuming that when a stock closes higher than its open, all volume associated with that trading period results from buyers. It further assumes that when a stock closes lower than its open, all volume associated withthat trading period results from sellers. Although these assumptions are overly simplistic, money flow can be a useful indicator when analyzing the general buying and selling pressure on a stock.
Volume Accumulation: The Volume Accumulation indicator, is a modification of the traditional OBV indicator. Instead of assigning all the period's volume to either buyers or sellers, the Volume Accumulator uses a proportional amount of volume based on the relationship between the closing price and its intra-period mean price. In effect, the indicator is measuring shades of gray that traditional volume indicators like OBV miss.However, if prices close at the period's high or low, all volume forthat period will be assigned accordingly, regardless of the relationship to the intra-period mean price.Movement of the oscillator above the zero line measures buying pressure, while movement below the zero line measures selling pressure.
General Terms:
Divergence: A situation that occurs when two lines on a chart move in opposite directions vertically. There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher while the stock is declining. A negative divergence occurs when the indicator moves lower while the stock is rising.
Whipsaw: A whipsaw occurs when a buy or sell signal is reversed in a short time. Volatile markets and sensitive indicators can cause whipsaws.
Author's Interpretation: CMF and A/D line represent retail buying/sentiment— when the overall trend is down you can interpret it as Retail Buyers beginning to lose faith in the movement.
ChiOsc and MFI represent Sellers affect on “normal” trading. When they are providing more supply than the demand can handle (MFI), money momentum is degraded/stopped (ChiOsc). ChiOsc will tell you when the run is losing momentum and MFI will tell you when the demand fades but the sellers remain. When the ChiOsc collapses along with a down trending MFI against flat or uptrending OBV, A/D and CMF, it can be interpreted as retailers trying to "catch a falling knife."
Given that, for momentum generated runs, the emphasis is placed on the average price to qualify/quantify supply/demand battles. Both CMF and MFI are tracked in multiple periods-- 3 periods for short-term trying to quantify the daytrader, flipper and heavy sellers and 21 periods to trend based on a typical month.
In the example below, periods 1 and 2 show normal buying/selling into a pop. Period 3 shows ChiOsc divergence during basing, suggesting a load into a pending run. Period 4 shows the selling shift as well as the Retail attempt to support price as momentum collapsed-- ominous foreboding going into Friday.
In the next example, the "devil in the details" detection can be more readily seen on an Intraday chart. Both the Money Flow and Volume Accumulation indicators whipsawed for the first 1 1/2 hours on Thursday before the ultimate crash during the 1:45 time block.
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