Chart courtesy of Stockcharts.com
You've probably calculated it before and didn't realize it. It's like trying to figure out how much you spent on gas last month after realizing you've thrown away all your receipts.
You know you stopped for gas 6 times.
You have a ten gallon tank, but can never seem to use the last gallon not matter how long the warning light stays on. So you could say that fill up was about 9 gallons.
You know that the lowest price you paid was $3.20 (because it felt like Christmas), and the highest you price you paid was $4.00 (which definitely didn't feel like Christmas).
To estimate your "money flow" on gas, you take the average price paid ($3.60), multiplied by the amount of gas you bought (54 gallons) for an estimate of $194.
Exact? No. Close? Yes.
In the same way, money flow is an estimate of the amount of money that changes hands. We don't know the exact number of people who bought or sold, nor do we know the exact price. But we can make an educated guess.
Safe Investing Tip:
When the talking heads mention money "flowing" into or out of a stock, this does not mean the same thing as "money flow". They're just describing enthusiasm for the stock.
The money flow index (MFI) is a momentum oscillator that shows changes in money flow over time. Technically, it is the money flow on days with rising prices verses the money flow on days with falling prices.
Typical Price = (High Price + Low Price + Closing Price) / 3Step 2 - Money Flow
Money Flow = Typical Price * Trading Volume
If today's typical price is highers than yesterday's, then today has a positive money flow.
If today's typical price is lower than yesterday's, then today has a negative money flow.
Money Ratio = Total Positive Money Flow / Total Negative Money FlowStep 4 - MFI
MFI = 100 - (100/(1 + Money Ratio))
If the MFI has a value of 20 or less, then the stock is considered oversold.
You can also look for differences between the MFI and price changes.
For example, if the price of a stock hits a new high, but the MFI is low or declining, this could tell you that there is not a lot of money behind this latest price increase (a weak rally attempt), and the stock could fall in price in the near future.