Stock Market Education & Resources

Money Flow Oscillator: Measuring Buying and Selling Pressure

June 5, 2025 Comments Off on Money Flow Oscillator: Measuring Buying and Selling Pressure

Introduction

The MFO is a momentum indicator that helps traders assess the strength of buying and selling pressure in a stock or asset. It is similar to the Money Flow Index (MFI) but is focused more on money flow direction rather than overbought/oversold conditions.

What is the MFO?

The MFO is based on price and volume data. It calculates the positive and negative money flow over a set period and expresses it as an oscillating value, typically ranging between -1 and +1. Traders use the MFO for better insights and predictions.

Formula for MFO:

MFI = 100 – [100 / (1 + Money Flow Ratio)]. 

  1. Typical Price (TP):
  2. Money Flow (MF):
  3. Positive & Negative Money Flow:
    • Positive MF: When TP is higher than the previous TP.
    • Negative MF: When TP is lower than the previous TP.
  4. Money Flow Oscillator Calculation:

How to Interpret the Money Flow Oscillator

  1. MFO Above 0 (Positive Money Flow):
    • Indicates strong buying pressure, as assessed using the Money Flow Oscillator.
    • Suggests an uptrend in price.
  2. MFO Below 0 (Negative Money Flow):
    • Indicates strong selling pressure.
    • Suggests a potential downtrend.
  3. Divergence Signals:
    • Bullish Divergence: Price makes a lower low, but MFO makes a higher low → Uptrend possible.
    • Bearish Divergence: Price makes a higher high, but MFO makes a lower high → Downtrend possible.

Trading Strategies Using MFO

1. Trend Confirmation Strategy

  • If MFO is above 0, confirm an uptrend before entering a long trade using the Money Flow Oscillator strategy.
  • If MFO is below 0, confirm a downtrend before entering a short trade.

2. Divergence Trading Strategy

  • Look for divergence between price movements and MFO using the MFO
  • A bullish divergence signals potential upward movement, while a bearish divergence signals a possible decline.

3. Combining MFO with Other Indicators

  • Use moving averages to confirm trend direction.
  • Combine MFO with Relative Strength Index (RSI) to validate momentum shifts.

Example of an MFO Trade

  • A stock is trending downward, but MFO turns positive, indicating increasing buying pressure. traders aim to capture reversals efficiently.
  • The trader enters a long position, capturing the reversal before the price moves higher.

Advantages of Using MFO

  1. Incorporates Price and Volume: Provides a deeper view of market strength.
  2. Identifies Institutional Activity: Highlights large movements analyzed through the mfo
  3. Works Well in Trending Markets: Helps confirm price direction before entering trades.

Limitations

  • False Signals in Choppy Markets: MFO may fluctuate without clear trends.
  • Best Used with Other Indicators: Combining with MACD or Bollinger Bands improves accuracy.

Conclusion

The (MFO) is an effective tool for measuring buying and selling strength in a stock. By combining MFO with trend-following indicators, traders can improve their accuracy in spotting market movements. The reliability of a MFO can be further enhanced by cross-referencing with other indicators.