How to trade money flow

* As of now, this discussion covers the definition of money flow and the behavior and theory behind the indicator.

Lets start this conversation about our definition of money flow.

Money Flow: The amount of money flowing in and out of a particular stock. In other words, the information these type of indicators can show us are things like, interest, hype and market desire.
Here at stone face trading we examine 3 main money flow indicators for our trading system. They are the, Money Flow Index, RSI, and a proprietary money flow formula we made called SF Money Flow.
There are plenty of other money flow type indicators but those 3 have tested above all the others.




Now I could go in very great detail of the mathematics of how and why money flow works. But you would get bored and leave.
So lets dive right into the behavior of pretty much all the money flow indicators.

As with almost every other technical indicator, there are only two things that can influence the behavior of money flow indicators: Volume and Price.
Points to remember:
1. If volume is high consider the stakes to be high.
2. High volume             = high indicator movement
3. Big price moves are important to consider
4. High price movement = high indicator movement

Let look at a the chart below for an example. Click to enlarge.


     You see how the long term trend of $MNST was upward? Then the price suddenly changed direction within the green box. Compare the price to the Money Flow Index. Do you notice any similarities? Yes, you will notice that the Money Flow Index almost mimics the price. 
    So you may ask "Well what the heck, if Money Flow mimics price then how is it any better than the price itself??" Well I'll tell you, Money Flows' have upper and lower bounds while price does not. 
     Now, if you are trader worth their salt you  know about out standing shares. There are only so many shares available for people to either buy or sell. 
Imagine if every one was holding their shares of MNST. Then one lonely guy decides to sell one share of his stock. What would that do to the price of his share (hint: remember supply and demand is how stock price is determined). Since supply is low, price (theoretically) will rise. 

    Okay look back at the chart. Watch the Money Flow Index in the green box, now look at the day the Money Flow Index reaches a value of 20(hits the red line). What does the price do for the next 3 days? They rise!!! 
     Why did they rise you ask? Think of it this way. Imagine a stock as a bucket of water. During the course of several days, the water may rise and fall, rise and fall, and so on. If the bucket of water was empty, shouldn't you be able to bet money on which direction the water will rise? There is only one way for the water to go once its emptied, up. The same can be applied if the bucket of water was full.
     With that thought in mind, the same concept applies to Money Flow indicators giving you oversold and overbought signals. If the indicator is overbought, its predicting the stock will fall. If the indicator is oversold, its predicting the price will rise. 

     Now only if actual stock trading was that easy. Money Flow is not always accurate and can ride the bottom(0) and the top(100) for several days. However, if you combine a Money Flow with a few other indicators you can become extremely profitable. 













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