1992issue C101-2
Constructing a money flow index from volume-weighted RSI
Build the money flow index by signing each session from typical-price change, scaling that signed session with volume, and compressing the lookback money ratio through a relative-strength transform. The same steps define a volume-weighted relative-strength index.
- Typical price is the session mean of high, low, and close, and a session is signed by whether that typical price rose or fell versus the prior session.
- Money flow is volume times typical price. A fourteen-session lookback sums positive money flow and negative money flow separately to form a money ratio.
- The money-flow index maps that ratio through a 100-scale relative-strength transform and is built as a volume-weighted relative-strength index.
- Editorial reading: treat readings above 80 or below 20, and disagreement with price, as a chart hypothesis rather than as a finished rule.
Three construction choices
The money flow index can be taught as three separable choices. The first choice is how a session is signed from the change in typical price. The second is how volume scales that signed move. The third is how the period money ratio is compressed into a bounded oscillator.
How a session is signed
A session typical price is the arithmetic mean of that session's high, low, and close. Typical price is the price path that is compared day to day before volume is applied. A session's money flow is labeled positive when typical price is above the prior session's typical price. It is labeled negative when typical price is below the prior session's typical price.
How volume scales the signed move
Session money flow equals volume multiplied by typical price. That product is later labeled positive or negative by the typical-price change. The sign comes from typical price. The scale comes from volume times typical price.
How the money ratio becomes an oscillator
A fourteen-session lookback is given as a workable window for summing positive money flow and negative money flow separately. Positive money flow is the lookback sum of money-flow values from sessions whose typical price rose versus the prior session. Negative money flow is the lookback sum of money-flow values from sessions whose typical price fell versus the prior session.
Money ratio equals the lookback sum of positive money flow divided by the lookback sum of negative money flow. The money-flow index equals 100 minus 100 divided by one plus the money ratio. That mapping is a 100-scale relative-strength transform and produces a bounded oscillator.
The volume-weighted relative-strength index
The money-flow index is built as a volume-weighted relative-strength index, substituting volume-scaled typical-price changes for unweighted close-to-close gains and losses. The relative-strength index is the baseline oscillator arithmetic that compares a lookback of up observations with a lookback of down observations and maps that ratio onto a scale from 0 to 100.
Candidate extremes and price disagreement
Readings above 80 or below 20 are treated as candidate extremes. Disagreement between the money-flow index and price is treated as a candidate reversal condition.
All readings on this track · 8 readings
- 1985Session windows, volume weights, and divergence in RSI construction
- 1989Constructing the money-flow index as a volume-weighted relative-strength oscillator
- 1992Constructing a money flow index from volume-weighted RSI
- 1994Constructing the money flow index as a volume-weighted relative strength index
- 2002Combine adaptive bands with the Relative Strength Index and volume-weighted RSI
- 2015Rebuilding a volume-weighted RSI and checking price-indicator divergence
- 2015Constructing the slow volume strength index from signed volume
- 2020Constructing a probability-defined trend filter