The Trend

Technical Analysis: The Importance of Money Flow

When it comes to trading, one of the best ways to tell how strong or weak a stock may be is by paying attention to the Money Flow Index (MFI).

In its simplest terms, money flow is another momentum indicator that indicates strength of money flowing in and out of a stock. If the flow of money into the stock is weak, we’ll begin to see MFI trend down. But as money flows into a stock, we can see this happening when MFI trends up.

It’s also essential in determining overbought and oversold conditions. 

For example, if MFI is below 30, the stock is considered oversold. If MFI is above 80, the stock is considered overbought. 

Even better, when MFI is used in combination with other indicators, such as your Bollinger Bands, MACD, and Williams’ %R, it can call tops and bottoms with up to 85% accuracy.

Look at a one-year chart of AT&T (T) for example.

Notice what happened up to 85% of the time when RSI fell to or below its 30-line, confirmed with each of our above-mentioned indicators. They stock bounced.  In the middle of August 2016, October 27, 2016, May 3, 2017, July 14, 2017, and September 7, 2017 and around November 7, 2017, RSI fell under its 30-line.

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Each time, the stock – when confirmed with other indicators – bounced.

Granted, any one can look at a chart and say, “If we bought it here, we could have seen this.” But we’ve proven many times that by finding a stock that’s just fallen below its 30-line or has just begun to recover from that point can create a buying opportunity.

We can even use RSI to pinpoint exact reversals, too.

Look at the same one-year chart of AT&T.

Look at what happens when RSI moves to or above its 80-line and can be confirmed with over-extensions on other indicators. The stock pulled back up to 85% of the time.

It happened in late June 2016, late December 2016, late July 2017 and early October 2017.

Again, any one can look at the chart after the fact and make an argument.

Pull up your favorite chart. Look at a one-, two-, even a five-year chart of that stock in question. Pull up RSI, MACD, Williams’ %R, and Bollinger Bands, and begin to recognize patterns and moves before they even happen. 

It may just improve the way you trade. 

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