Using the Money Flow Indicator

Nov. 16, 2022

There are a couple of things I’m obsessing about lately.

One is the KISS style of trading, which removes inputs and simply lets the strategy work. We’ve talked about that.

The other is stop-and-reverse (S&R) trading.

Intellectually, I’m pretty sure that S&R trading is the most robust style of trading on earth.

Why?

Because it’s immune to almost all the things that system traders are scared of.

S&R trading takes an entry based on certain conditions and then ONLY exits when opposite conditions occur. No targets, stops, break-evens, trailing stops, indicator readings, or emotion.

If we have a great reason to get into a trade, we should stay in that trade until our reason is completely nullified by opposite conditions. Nothing to over-optimize. Nothing to shake us out prematurely.

It’s the purest way to ride the market (and follow the trends) to big wins.

Theoretically.

But real life has a way of obliterating intellectually tantalizing ideas (we’re looking at you, Efficient Market Hypothesis).

To investigate, we’ll examine the Money Flow indicator.

A lot of indicators ingeniously use price to determine Overbought and Oversold conditions, but Money Flow goes one step further. It uses price AND volume to determine its calculations.

If price goes up and volume goes up, money is flowing into that instrument. If the opposite is true, money is flowing out.

So, if we follow the money flow, we should find good trades.

Let’s see.

Here’s a chart of the CC futures contract (Cocoa). This system was suggested by Kevin Davey (an expert on Futures) and is on the 120-minute chart. It goes Long when the Money Flow indicator crosses above Oversold and goes Short when Money Flow crosses below Overbought. The Length is set to 14 and Overbought/Oversold is 80/20. It’s always in the market. It just oscillates from Long to Short continuously.

Here are some sample trades:

And here is the Performance Report for the past 15 years trading 1 contract each time:

I’m amazed at how well it did while undoubtedly being robust (due to its S&R methodology).

That said, if you added a $1500 stoploss, it got even better:

I like this indicator and I love its S&R nature. I’m seriously considering getting some stop-and-reverse strategies into my overall portfolio.

In our next Newsletter, we’ll look at another strategy that’s recently caught my eye.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.