Introduction to Twiggs Money Flow
Twiggs Money Flow (TMF) is a volume-based indicator developed by Colin Twiggs as a variation of the Chaikin Money Flow (CMF) indicator. It helps traders identify trends, confirm price movements, and detect potential reversals by analyzing the flow of money into and out of a security.
Unlike CMF, which uses a simple moving average, TMF applies an exponential smoothing technique to better capture money flow trends. This makes it a more responsive tool for traders looking to gauge accumulation and distribution within a stock or other financial instruments.
Where:
- MFV (Money Flow Volume) = (Close – Low) – (High – Close) \times Volume / (High – Low)
- N is the chosen period (usually 21 days for short-term trading)
- V represents the total volume over the period
When the TMF value is positive, it indicates that accumulation is occurring, meaning buyers are in control. Conversely, a negative TMF suggests distribution, implying selling pressure.
Interpreting Twiggs Money Flow
The TMF fluctuates above and below a zero line. The key interpretations include:
- Above zero: Indicates bullish momentum and accumulation of the asset.
- Below zero: Indicates bearish momentum and distribution of the asset.
- Crossing above zero: A buy signal as it confirms money inflow.
- Crossing below zero: A sell signal as it suggests money outflow.
- Divergence: If the price is making new highs but TMF fails to follow suit, it indicates weakening momentum and a potential reversal.
Trading Strategies Using Twiggs Money Flow
1. Trend Confirmation Strategy
The simplest way to use TMF is to confirm the underlying trend.
How to trade:
- If the price is in an uptrend and TMF remains above zero, it confirms strong buying pressure.
- If the price is in a downtrend and TMF stays below zero, it confirms strong selling pressure.
- When TMF diverges from the price action, it signals a weakening trend and a possible reversal.
Example:
- Suppose a stock is forming higher highs, but TMF begins to decline. This suggests that buying pressure is weakening and that a potential price drop may occur.
2. Zero Line Cross Strategy
A common method of trading TMF is to watch for crossovers above or below the zero line.
How to trade:
- When TMF crosses above zero, enter a long position as it signals increasing buying pressure.
- When TMF crosses below zero, enter a short position as it indicates rising selling pressure.
Example:
- If a stock has been trading sideways and suddenly TMF crosses above zero, it may be a good time to buy as it suggests renewed buying interest.
3. Divergence Trading Strategy
Divergence between TMF and price is a powerful reversal signal.
How to trade:
- Bullish divergence: When price makes lower lows but TMF forms higher lows, indicating a weakening downtrend and potential bullish reversal.
- Bearish divergence: When price makes higher highs but TMF forms lower highs, signaling declining momentum and possible bearish reversal.
Example:
- If a stock is forming a series of lower lows but TMF is forming higher lows, it suggests sellers are losing strength, and an upside reversal may be imminent.
4. Breakout Trading Strategy
TMF can help identify strong breakout moves when combined with price patterns such as triangles, flags, and channels.
How to trade:
- If TMF rises significantly while the price breaks out of a resistance level, it confirms a strong breakout and a continuation of the trend.
- If TMF declines while the price breaks below a support level, it confirms a strong breakdown and suggests further downside movement.
Example:
- Suppose a stock is trading in a consolidation phase. If it breaks out above resistance with a sharp increase in TMF, it signals strong buying momentum and a high probability of sustained gains.
5. Overbought and Oversold Conditions
While TMF does not have fixed overbought and oversold levels like the RSI, extreme values can still signal potential reversals.
How to trade:
- If TMF reaches extremely high values (above +0.5), the stock may be overbought, and a correction could follow.
- If TMF falls to extremely low values (below -0.5), the stock may be oversold, and a rebound could be near.
Example:
- If TMF is at +0.7 while the price is near resistance, it may be a good time to take profits or look for a shorting opportunity.
Combining TMF with Other Indicators
To enhance the accuracy of trading signals, traders often use TMF in combination with other indicators.
- TMF + Moving Averages
- A bullish signal is stronger when TMF crosses above zero, and the price is above a rising 50-day moving average.
- A bearish signal is stronger when TMF crosses below zero, and the price is below a falling 50-day moving average.
- TMF + RSI (Relative Strength Index)
- If TMF shows bullish divergence and RSI is below 30 (oversold), it strengthens the buy signal.
- If TMF shows bearish divergence and RSI is above 70 (overbought), it strengthens the sell signal.
- TMF + Volume Analysis
- If TMF rises with high volume, it confirms strong buying pressure.
- If TMF declines with high volume, it confirms strong selling pressure.
Common Mistakes to Avoid When Trading TMF
- Ignoring Market Context – TMF should be used in conjunction with overall market trends and key support/resistance levels.
- Over-Reliance on Zero Line Crossovers – False signals can occur, so confirming with price action or other indicators is crucial.
- Neglecting Divergences – Divergences are strong signals and should not be ignored, as they often precede major trend reversals.
- Using a Fixed TMF Period Without Adjustment – Different assets may require different TMF settings. Testing different periods is essential for optimal performance.
Conclusion
Twiggs Money Flow is a powerful tool for analyzing market sentiment and identifying high-probability trading opportunities. By using it to confirm trends, detect divergences, and support breakout strategies, traders can significantly improve their decision-making process. However, for best results, TMF should be used in combination with other technical indicators and price action analysis.
With proper risk management and disciplined execution, TMF can be a valuable addition to any trader’s toolkit, helping to navigate the complexities of the financial markets with greater confidence.