Thursday, May 03, 2007

Intraday Patterns in the Money Flow Data

In my recent post, I illustrated a short-term trending pattern in the intraday money flow data. In Wednesday's market, I tapped Home Depot (HD; blue line) for this same pattern, as it opened higher in a mixed market (thanks to favorable housing news) and then proceeded to rise on strong money flow (red line).

Around 10:30 AM ET, however, it was clear something was wrong. A few large trades lifting offers in HD had taken money flow to daily highs, but price was no longer participating. Readers will observe that this is the same inefficiency pattern that we see in the NYSE TICK data at market tops in the indexes.

From there, price moved steadily lower in HD, even as the broad market registered fresh highs. Interestingly, money flow bottomed out around 11:15 AM, well ahead of price. That is also a bottoming pattern we frequently see in the NYSE TICK, as selling pressure dries up on new price lows.

It makes sense that patterns in the money flow might mirror patterns in the NYSE TICK, as money flow is really a volume-weighted TICK measure for each individual stock. (More on how money flow is calculated can be found here).

I strongly suspect that this can be a powerful tool in the arsenal of the intraday trader of individual stocks. (Note: data from RealTick, charted in Excel).

7 comments:

ccooper said...

I don't think I understand why you bother calculating dollar volume instead of simply using the volume at bid/ask. The price realistically only changes by a small amount during your period of calculation, so I suspect that you would see very much the same results by simply using the volume instead of price * volume. You can divide by the average volume at time period to get your relative volume flow indicator.

Ziad said...

Hey Dr. Brett,

It seems to me that your intraday money flow indicator is simply a more scientific way to guage trend strength and eventual inefficiencies, which you currently guage in a more intuitive way by looking at market delta charts and the TICK indicator. As such, the money flow indicator isn't really telling you anything new, but it simply makes your intuitive analysis more systematic and easier and allows for better comparisons to recent norms. Would you agree with that?

Brett Steenbarger, Ph.D. said...

Hi C. Cooper,

I assume by "volume at bid/ask" you mean something akin to Market Delta, where you parcel volume that transacts at the market bid vs. offer. For intraday purposes, the money flow data should indeed closely track Market Delta for an individual stock. Some of my money flow work tracks multi-day patterns going back to mid 2004; I'm not sure historical Market Delta data are available over such a lengthy lookback period. Also, for volatile and trending instruments, one would expect dollar volume flows to give very different readings than Market Delta due to the price weightings and the large shifts in price over a period of months or years.

Great question; thanks--

Brett

Brett Steenbarger, Ph.D. said...

Hi Ziad,

Thanks for the great question. I wouldn't say that money flow "isn't really telling you anything new". It is *very* different from NYSE TICK, because it is a measure specific to individual stocks. As I noted in my response to C. Cooper, it is more similar to Market Delta, especially at short time frames. Over longer time periods, money flow data has been very helpful in identifying swing patterns specific to individual equities and indices. I don't know of such applications of Market Delta--

Brett

Kathy said...

Hi Brett:
How many data points do you use to calculate money volume flow in this chart?
Do you use data at the end of every 15 minutes or you use data of all trades (transactions) but only plot at 15 minutes interval?
For HD there could be several hundreds transactions in a 15 minutes interval and I wonder if it is possible to get that kind of data feed.
Thanks.
Bruce

Brett Steenbarger, Ph.D. said...

Hi Bruce,

I use every transaction in the stock and plot in 15 minute intervals. There are indeed many hundred transactions in any active stock. RealTick enables you to download that info to Excel for analysis.

Brett

TTmarun said...

Hi Brett,
Your unbelivably generous with your work, it's much appriciated..
I'm trading the dax out here in CA and this moneyflow indicator is going to be a great help for me in trading that contract. there is no tick or adv/dec info avalable on it. it's going to be a challenge putting it together yet worth all the time and effort.. thx jt