What is Money Flow Index Divergence and How Do You Use It To Find A Trend?
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Money Flow Index Divergence measures the difference between the price and the relative strength index. Money Flow Index indicates the momentum in a trend when it changes from a negative to a positive divergence.
Understanding Money Flow Index Divergence
Money Flow Index divergence is a concept in technical analysis that alerts you to a potential trend reversal. There are a few different types of divergence, but the one we’ll focus on is what’s called negative divergence. Negative divergence occurs when the current Money Flow Index reading (or “momentum”) is lower than the prior reading. If the divergence is negative and the market is trending up, then traders can expect a downwards trend for this particular asset.
Confirming the Money Flow Index Divergence
A popular strategy among traders is to measure the Relative Strength Index (Money Flow Index) in order to help determine when a stock is overbought or oversold. If an Money Flow Index diverges from price, it can signal a change in trend.
The Money Flow Index compares closing prices with the highs and lows of the day, giving it a value between 0 and 100. Traders watch for a divergence where a stock’s price continues to go up but the Money Flow Index heads down.
Understanding the Money Flow Index Divergence Pattern
Money Flow Index Divergence is the difference between the Money Flow Index values over time. The Money Flow Index value moves up and down due to price movements. If price increases then the Money Flow Index will rise because more buyers are entering the market. The divergence occurs when the Money Flow Index has a lower value. This signal can be seen as a trend reversal, but it is still volatile.