How Money Flow Indicators Help Day Traders Predict Price Trends - dummies

How Money Flow Indicators Help Day Traders Predict Price Trends

Money flows tell day traders how much money is going into or out of a securities market. They are another set of indicators telling you where the market sentiment is right now and where it may be going soon. Money flow indicators combine features of price and volume indicators to help traders gauge the market.

The enthusiasm of the buyers and the anxiousness of the sellers show up in the volume traded and the direction of the price change. Just how hard was it for the buyers to get the sellers to part with their positions? And how hard will it be to get them to part with their positions tomorrow? That’s the information contained in money flow indicators.

The most basic money flow indicator is the change in closing price multiplied by the number of shares traded. If the closing price was higher than the closing price yesterday, then the number is positive; if the closing price today was lower than the price yesterday, then the number is negative.

Other indicators are out there that use midpoint values and do not go negative; instead, the numbers range from higher to lower. Whether positive or negative, a high money flow indicates strong buying activity, and that indicates that a positive price trend is likely to continue.

Some of the more commonly used money flow indicators are the accumulation/distribution index, the money flow ratio, the money flow index, and the short interest ratio.