1994issue C081-2
Constructing the money flow index as a volume-weighted relative strength index
The money flow index is constructed as a volume-weighted form of the relative strength index. Direction comes from typical price versus the prior bar, volume weights each classified bar, and a 14-bar money ratio is mapped onto a zero-to-100 scale.
- The money flow index is constructed as a volume-weighted form of the relative strength index.
- Direction is taken from whether the current bar's typical price is above or below the prior bar's typical price, not from up closes versus down closes.
- Positive money flow and negative money flow are typical price times volume on up and down typical-price bars, then summed separately over a 14-bar lookback.
- Those two sums form a money ratio that is mapped onto a zero-to-100 scale as one hundred minus one hundred divided by one plus the ratio.
A volume-weighted relative strength construction
The money flow index is constructed as a volume-weighted form of the relative strength index. The relative strength index is the baseline oscillator that compares summed up-close strength with down-close strength over a stated lookback and maps that ratio onto a zero-to-100 scale.
A volume-weighted relative strength index replaces close-to-close up and down days with volume-weighted typical-price advances and declines. That is the construction path used here.
Typical price sets the direction rule
Direction is taken from whether the current bar's typical price is above or below the prior bar's typical price, not from up closes versus down closes. Typical price is the mean of the high, the low, and the close. It is used as the price input in place of the close.
Volume turns typical price into money flow
Money flow is typical price multiplied by that bar's volume when typical price has risen or fallen versus the prior bar. Positive money flow is typical price times volume on an up typical-price bar. Negative money flow is typical price times volume on a down typical-price bar.
The 14-bar money ratio and the zero-to-100 map
A 14-bar construction separately sums positive money flow and negative money flow over that lookback. Those two sums form a money ratio, which is the lookback sum of positive money flow divided by the lookback sum of negative money flow, before the zero-to-100 transform. The ratio is then mapped onto a zero-to-100 scale as one hundred minus one hundred divided by one plus the ratio.
The money flow index is the resulting zero-to-100 oscillator. Each bar is classified by whether typical price rose or fell, that typical price is weighted by volume, the two flow streams are summed over a fixed lookback, and their ratio is normalized.
How the worksheet records volume
The worked 14-bar worksheet records volume in units of one hundred shares.
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