1989issue C031-5
Constructing the money-flow index as a volume-weighted relative-strength oscillator
A close-only relative-strength oscillator cannot register how much trading accompanies a price change. This construction rebuilds the same 0-100 scale from typical price and volume so each session enters as money flow rather than as an equal close.
- A standard relative-strength oscillator is computed from closing prices alone and cannot register the trading activity that accompanies a price change.
- Typical price tags a session as positive or negative, and session money flow is volume multiplied by that typical price.
- Positive and negative money-flow sums over a chosen lookback form a money ratio that is mapped onto a 0-100 money-flow index.
- Readings above 80 or below 20, plus failure swings around those bands and divergence from price, are treated as the primary candidate reversal patterns.
Why the close-only oscillator is rebuilt
A standard relative-strength oscillator is computed from closing prices alone. It is a bounded 0-100 oscillator built from a lookback of closing-price advances and declines, with no volume term, so it cannot register how much trading activity accompanies a price change.
Wide swings in volume at market tops and bottoms are treated as a reason to rebuild a relative-strength-style index with a volume weight. The stated design goal is to put both price and volume into one bounded oscillator, rather than using only one of those inputs to mark momentum or supply-demand conditions.
Typical price, money flow, and the money ratio
Daily typical price is the mean of high, low, and close divided by 3. A session is tagged positive or negative by whether that typical price rose or fell versus the prior session.
Session money flow equals volume multiplied by that typical price. The result is a relative-strength-style oscillator that scales each session by traded volume instead of treating every close as equal.
Over a chosen lookback the sums of positive and negative money flow form a money ratio. Fourteen days is offered as a workable default. 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. The money ratio is positive money flow divided by negative money flow over the same window.
That money ratio is mapped onto a 0-100 money-flow index as 100 minus 100 divided by one plus the money ratio.
How the bands are read
The construction treats readings above 80 or below 20 as candidate tops and bottoms. Failure swings around those bands, plus divergence from price, are treated as the primary reversal patterns. A failure swing is a second thrust toward an extreme that fails to undercut or exceed the prior extreme, then recrosses the intervening pivot.
Readings near 90 and 10 are described as unusually extreme optimism or pessimism and as candidate conditions for an approaching trend change.
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