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Money Flow Index Divergences

Money Flow Index

  1. Money Flow Index
  2. Money Flow Index Divergences

Since the Money Flow Index uses volume in its calculation, this indicator can prove effective as a divergence indicator. The theory is as follows:

The chart below of Microsoft (MSFT) shows the effectiveness of the Money Flow Index in detecting bullish and bearish divergences:

money flow index divergences

In the chart above, beginning on the left, Microsoft's stock price is in a downtrend; however, the Money Flow Index is not going downwards, in fact, it is sloping upwards. This is a good illustration of a bullish divergence.

On the second half of the chart, Microsoft is making new highs, yet the Money Flow Index is making lower highs, a bearish divergence. Stock traders of MSFT might be advised to scale out of their position because money is flowing out of Microsoft stock.

Later, the price of Google increased, and the MFI indicator confirmed that increase. This might be interpreted that the trend in Google still has buying pressure and that the stock trader might consider continuing to hold their long position in the stock.

The Money Flow Index is an interesting technical analysis tool due to its ability to incorporate both price and volume into its calculations.

Other technical analyis tools similar to the Money Flow Index, is the On Balance Volume indicator (see: On Balance Volume) and the Chaikin Oscillator (see: Chaikin Oscillator).

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