Understanding Money Flow: What Is It And Its Use in Trading
Many people talk about money flow, yet most are still in the dark about what it is. And it gets worse as some people use it to mislead others by giving wrong information. To those who don’t understand, they take the term as a buzzword that trader uses. Therefore, we’re going deep into what the term means and how it applies in the trading world.
What is the money flow?
The flow refers to the calculation that a trader does every day. They calculate the average high, lows, and closing price, and multiply it by the trading volume that day. After they found the number, a trader will compare it with the result from the previous day to know if the market is having a positive or negative flow.
A positive flow is when the average is higher than yesterday. It also means the market is going upward, and perhaps with a tendency of going bullish. On the contrary, when the average is lower, then it’s a negative flow. Understanding this number and how it calculates can help you to build better trading strategies.
How to Use the Flow in Trading
One of the primary uses of money flow is in trading, primarily on building a strategy to trade that day. As a trader, you should use all of the information you can get to trade, including the flows.
When the market has a positive flow followed by rising stock prices, it means traders can have a field day on the flow. It means that investors are willing to pay for the stocks even at a higher price. A positive uptick like this means a trader can garner more profits.
But when the stock prices are rising but there wasn’t much trading which leads to negative flow, it may be a sign of a price reversal. You need to keep an open eye for any policy changes that may affect the trend in the market.
The Essential Tool
Naturally, you can’t always keep an eye on the market all day long even though you want to. So how to expertly navigate the market? The answer is by having the correct tool to predict the market flow that day.
Most of the tools limit their features to only predicting the trading flow. But that’s not the case for the Chaikin oscillator. This popular tool also includes other factors such as exponential moving averages to predict the momentum. While the result may vary between all traders, with the tool made by Marc Chaikin, you can have a more accurate prediction of the market.
Trading is not as difficult as it looks like. The same also goes for understanding money flow. This calculation includes all of the crucial components of trading, from the lowest value to the highest, and the amount of trades that day. When the flow is higher than yesterday, then it means the market has a positive tick and you can take advantage of it to gain more profit.
