Money flow reflects the net cash bought or sold in a stock accumulated by investors. Since large investors have to invest monies in significant amounts in order to create new stock positions, it should be possible to track institutional purchases by measuring the volume and price trend of a stock.
Use a spreadsheet to track the open, high, low and close of a stock. Enter the data in a daily column for each input point. Compute in a fifth column the difference between the stock high and low for the day. This is called the stock range. Look for the range to narrow when institutions are buying stock.
Create a sixth column to denote the difference between the stock close and its high of the day. Stocks that close above the open but at or just below the high price of the day are probably being accumulated.
Enter the stock volume in column seven. Compute the simple 20-day moving average of the stock volume and enter the data in column eight. Volume should generally be flat or rising during accumulation.
Combine the results in steps 1, 2, and 3 and look for patterns as described. These are stocks under accumulation. If stock volume increases on a day when the stock is up, that should be considered confirmation of the trend. If stock volume is up and stock price is down, this is considered a distribution day. This could be a sign of institutional selling.
Use the same steps described above for stocks being sold by institutions by looking for opposite results. When three or more distribution days occur within a two or three week period, it is usually a clear signal that an intermediate or long-term price break is occurring.
Look at a graph of the stock. A stock under accumulation will often resemble a cup and handle pattern. When the handle is complete, expect a large volume breakout of the stock. This is done by the institution to indicate it has completed its stock purchase. It indicates that accumulation of stock is complete. The higher prices paid on the last shares of stock have the effect of boosting the market value of all shares the institution purchased and thus creating large paper gains.
Do not trade stocks based solely on money flow. Use moving average technical indicators or fundamental analysis to measure a company's going concern value.
Distribution days are important. Keep careful track of their occurrence.
- Technical Analysis of Stocks
- Stock Market Glossary
- Vanguard. "Understanding ETF Liquidity and Trading," Page 1. Accessed April 22, 2020.
- SEC. "Ask Price." Accessed April 22, 2020.
- SEC. "Bid Price." Accessed April 22, 2020.
- Vanguard. "Understanding ETF Liquidity and Trading," Pages 1-3. Accessed April 22, 2020.
- Charles Schwab. "Trading Volume as a Market Indicator." Accessed April 22, 2020.
- Corporate Finance Institute. "What Is Volume?" Accessed April 22, 2020.
- Do not trade stocks based solely on money flow. Use moving average technical indicators or fundamental analysis to measure a company's going concern value.
- Distribution days are important. Keep careful track of their occurrence.
After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.