Money flow is a metric used in technical analysis that seeks to measure the amount of money flowing in and out of a security over a specific time period. Think of it as the net amount of a company’s equity being purchased or sold. It is essentially a calculation that shows whether more trading money has been flowing into or out of a security.
The metric is used by traders to predict future price trends. Positive money flow happens when a stock is bought enthusiastically, often indicated by higher ending prices; negative money flow suggests the stock is sold vigorously, ending at lower prices. By using the money flow, traders can estimate the selling or buying pressure on a specific stock.
Related Questions
1. How is money flow calculated?
Money flow is calculated by multiplying the day’s average price by the volume of shares traded that day. Positive and negative money flow are then compared to identify buying or selling pressure.
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2. What does positive money flow suggest?
Positive money flow suggests that a stock is being bought enthusiastically, often indicated by ending prices being higher for the day. It could be a sign that the security might increase in price due to high buying pressure.
3. What’s the difference between money flow and cash flow?
Money flow refers to the total amount of money being transferred into and out of a security in a particular period. In contrast, cash flow refers to the money moving in and out of a company’s account, used to assess the company’s financial health.
4. Who uses money flow and why?
Money flow is used mainly by traders and investors in the stock market as a technical analysis tool aimed at predicting future price trends, giving some indication of whether an underlying security is being bought or sold off.
5. What factors can affect money flow?
Several factors can affect money flow including market sentiment, economic indicators, financial statements, macroeconomic news, company announcements, and overall market trends.