Navigating the erratic world of financial markets can be a daunting task, which is why traders are always seeking better tools to improve their technical analysis — one such tool is the Twiggs Money Flow indicator. What do you know about the indicator?
Twiggs Money Flow is a volume-based indicator that estimates the flow of money into or out of an asset by calculating the ratio between weighted volume EMA and ordinary volume EMA. As with most other volume indicators, Twiggs Money Flow takes into account both price and volume fluctuations to evaluate the buying or selling pressure in the market.
In this post, we will take a look at most of the questions you may have about the Twiggs Money Flow: what it is, how it works, and how you can improve your trading strategies with it. Keep reading!
Key Takeaways
- The Twiggs Money Flow is a volume-based indicator that estimates the flow of money into or out of an asset by calculating the ratio between weighted volume EMA — weighted based on the closing price location relative to the True Range — and ordinary volume EMA.
- We provide you with a backtested Twiggs Money Flow trading strategy – complete with trading rules.
- Please click here for a full list of trading indicators.
What is Twiggs Money Flow in trading?
In trading, the Twiggs Money Flow is a volume-based indicator that estimates the flow of money into or out of an asset by calculating the ratio between weighted volume EMA — weighted based on the closing price location relative to the True Range — and ordinary volume EMA.
As with most other volume indicators, Twiggs Money Flow takes into account both price and volume fluctuations to evaluate the buying or selling pressure in the market. Created by Colin Twiggs, the indicator is derived from the popular Chaikin Money Flow (CMF) indicator, which, in turn, is a modification of the Accumulation Distribution Line.
The indicator is used to assess bullish and bearish money flow. It is similar to the Chaikin Money Flow, but while the CMF uses the closing price location relative to the current price bar’s range, the Twiggs Money Flow uses the closing price location relative to the True Range so as to include gaps in the calculations. In addition, Twiggs Money Flow uses EMAs in its calculation rather than the cumulative sum over a given period used in CMF.
Twigs Money Flow trading strategy
Let’s backtest a trading strategy that has the following trading rules.
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The trading rules are simple, but it has produced good results. This is the equity curve for SPY (S&P 500) from its inception until today:
Trading performance metrics and statistics from inception until today (including 0.03% commissions per trade):
- Number of trades: 160
- Average gain per trade: 0.93%
- Annual returns: 4.6%
- Win rate: 78%
- Time spent in the market: 6%
- Risk-adjusted return: 73%
- Max drawdown: 20%
This is the code we used for the backtest (Amibroker):
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How does Twiggs Money Flow indicator work?
The Twiggs Money Flow works as a measure of buying (bullish) or selling (bearish) pressure in the market. It is calculated as a percentage ratio of weighted volume EMA to volume EMA. The weighted volume — Colin Twiggs named it Range Volume by the way — is weighted by the proximity of the closing price to the True High and True Low.
As such, if the closing price is at the True High, 100% of the weighted volume (range volume) is considered bullish volume, and if the closing price is at the True Low, 100% of the range volume is considered bearish volume. Also, if the closing price is exactly at the midpoint of the True Range, the range volume becomes zero.
Thus, any close above the midpoint of the True Range gives a bullish volume value (positive readings on the indicator), but the value is dependent on how near the close is to the True High, with the True High assigned the maximum and the midpoint assigned zero. On the flip side, any close below the midpoint of the True Range gives a bearish volume value (negative readings on the indicator), but the value is dependent on how near the close is to the True Low, with the True Low assigned the maximum and the midpoint assigned zero.
The indicator generally generates two types of signals: the zero-line crossover signal and the divergence signal. When the indicator crosses above the zero line, it gives a positive reading, which means there is bullish pressure and it’s time to buy. When the indicator crosses below the zero line, it gives a negative reading, which means there is bearish pressure and it’s time to sell. Also, a bullish divergence is a buy signal, while a bearish divergence is a sell signal. Some traders and analysts may add an EMA of the indicator as a signal line and use the signal line crossovers as their buy and sell signals.
Why is Twiggs Money Flow useful for traders?
The Twiggs Money Flow is useful for traders because it helps to show whether the money flow (or volume) is supportive of buying pressure or selling pressure. The indicator assigns volume (money flow) as bullish or bearish based on where the price closed relative to the True Range.
Traders use it to know when there is bullish pressure in the market so they can look for buying opportunities and when there is bearish pressure so they can look for selling opportunities.
Who developed the Twiggs Money Flow indicator?
Colin Twiggs developed the Twiggs Money Flow indicator for IncredibleCharts in an effort to improve the Chaikin Money Flow (CMF). Colin is a renowned trader and a former investment banker who specializes in combining economic data analysis with technical analysis of the various financial markets — stocks, markets, commodities, and currencies.
He was born in Durban, South Africa, in 1958. Colin was trained as a chartered accountant and worked with various international investment banks, taking different trading and operational roles. He later moved to Australia in 1998 to concentrate on full-time trading. Eight months before the global recession, he accurately predicted the October 2007 bear market.
When should you use Twiggs Money Flow?
When you use the Twiggs Money Flow will depend on your trading strategy. You can use the indicator to assess whether there is accumulation or distribution in a consolidating market — positive readings or bullish divergence indicate accumulation, while negative readings or bearish divergence suggest distribution.
You can also use it to time the end of a pullback in a trending market. In an uptrend, the pullback will be downward, with mostly negative readings on the indicator. When the indicator starts giving positive readings, it could be a signal to go long. The opposite is true for a downtrend.
What is the difference between the Twiggs Money Flow and other indicators?
The difference between Twiggs Money Flow and other indicators is that the former evaluates money flow into a market and classifies it into a bullish money flow or bearish money flow based on the location of closing price relative to the True Range. Other indicators, such as the CMF or Accumulation Distribution Line, on the other hand, use the close value location relative to the current period’s range — in other words, they don’t consider situations when there are gaps in the market.
How is the Twiggs Money Flow calculated?
The Twiggs Money Flow is calculated using this formula:
Twigg Money Flow = 100 x EMA[Volume x ((2x(Close — TL)/(TH — TL)) — 1)]/EMA[Volume]
Where:
EMA = exponential moving average
Close = Current period’s closing price
TL = True Low, which is the lower of the current period’s low or the preceding period’s close
TH = True High, which is the higher of the current period’s high or the preceding period’s close.
The calculation can be broken down into these steps:
Step 1: Calculating the True Range Close location (TRCL):
TRCL = 2x (Close — TL) / (TH — TL) — 1
OR
TRCL = (2xClose — TL — TH) / (TH — TL)
Step 2: Calculating the EMA of Weighted Volume, aka Range Volume:
Range Volume = EMA (Volume x TRCL)
Step 3: Calculating the Twiggs Money Flow
Twiggs Money Flow = 100 x Range Volume / EMA(Volume)
Note that the default EMA period for the Twiggs Money Flow is 21. Some analysts may add an n-period EMA of the indicator to get a signal line.
How do volume and price influence the Twiggs Money Flow?
Volume and price data influence the Twiggs Money Flow in a very significant way because both data are used in the calculation of the indicator. The idea of the indicator is to use where the price closes relative to the True Range to determine how much of the volume contributes to the market pressure and in which direction the pressure is — bullish or bearish.
When the price closes above the midpoint of the True Range, it assigns the volume a bullish value (positive readings on the indicator), but the value is dependent on how near the close is to the True High, with the True High assigned the maximum and the midpoint assigned zero.
On the flip side, when the price closes below the midpoint of the True Range, it assigns a bearish volume value (negative readings on the indicator), but the value is dependent on how near the close is to the True Low, with the True Low assigned the maximum and the midpoint assigned zero. Also, the bigger the volume, the bigger the reading on the indicator on either side of the zero line.
Can Twiggs Money Flow help predict stock trends?
Yes, the Twiggs Money Flow can help predict stock trends but mostly short-term trends. The indicator mostly focuses on determining whether there is a buying or selling pressure in the market, rather than the long-term direction of the market.
However, buying pressure on the daily or weekly timeframe can be a full trend to a day trader who trades on the hourly or 15-minute timeframe. So, it depends on the timeframe and trading style too.
Is Twiggs Money Flow a leading or lagging indicator?
The Twiggs Money Flow is a lagging indicator because it is calculated from past price data. This means that the price action happens before the indicator signal appears.
And here is why: The price close location relative to the True Range used in the calculation is a part of historical price data by the time the indicator is plotted. Also, the indicator uses a 21-period exponential moving average, which further makes the indicator lag more.
How do you interpret positive and negative Twiggs Money Flow values?
To interpret positive and negative Twiggs Money Flow values, you have to consider the trend direction and what the price is doing at the moment. Generally, positive Twiggs Money Flow values suggest bullish pressure and negative values suggest bearish pressure.
However, this must be interpreted in light of the trend direction and price structure to make a trading decision. If the market is in a downtrend and the indicator shows positive values, it could mean that the market wants to pull back.
What are the main signals in Twiggs Money Flow?
The main signals in Twiggs Money Flow are as follows:
The zero-line crossovers: When the indicator crosses above the zero line from below, it suggests bullish pressure, especially if the market is already trending up. When the indicator crosses below the zero line, it means negative values, and thus, bearish pressure.
The divergence signals: A bullish divergence occurs when the price is making a lower low while the indicator is making a higher low. It is a bullish signal. A bearish divergence occurs when the price is making a higher high but the indicator is making a lower high.
Can Twiggs Money Flow be used in all markets?
No, the Twiggs Money Flow cannot be used in all markets because it is a volume-based indicator and, as such, will not work in markets where there are no records of real volume data. For example, the spot forex market is traded over the counter.
With no central exchange, there is no reliable volume data for the market. So, the Twiggs Money Flow cannot be used in such a market.
How do you add Twiggs Money Flow to your trading chart?
To add the Twiggs Money Flow to your trading chart, you simply go to the indicator session of your trading platform to pick the indicator and attach it to your chart. If the indicator is not part of the built-in indicators on your platform, you will have to first get a custom-made indicator and install it before you can attach it to your chart.
What settings should you use for Twiggs Money Flow?
The settings you use for Twiggs Money Flow will depend on your trading strategy and the result of your backtesting. The default setting of the indicator’s EMA is 21 periods, but you can use whatever period setting you want. You will have to experiment with different periods during your backtesting to find the one that works best for your strategy.
How can Twiggs Money Flow identify accumulation and distribution?
The Twiggs Money Flow can identify accumulation and distribution by showing the direction of the money flow in the market. It uses where the price closes relative to the True Range to determine the direction of the money flow and the weighting assigned to the range volume.
The price closing above the midpoint of the True Range means that the money flow is bullish (positive readings on the indicator), but the value is dependent on how near the close is to the True High, with the True High assigned the maximum and the midpoint assigned zero.
Conversely, the price closing below the midpoint of the True Range means that money flow is bearish (negative readings on the indicator), but the value is dependent on how near the close is to the True Low, with the True Low assigned the maximum and the midpoint assigned zero.
What timeframes work best with Twiggs Money Flow?
The timeframes that work best with Twiggs Money Flow will depend on your trading style and the market you’re trading. If you’re a day trader, the hourly, 30-minute, and 15-minute timeframes may be the best for you.
For a swing trader though, the 4-hourly and daily timeframes are likely the more useful ones for trading and analysis. However, you will need to backtest to find out the timeframe that offers you an edge in the market.
How reliable is Twiggs Money Flow for day trading?
The Twiggs Money Flow can be reliable for day trading if you have a good day trading strategy with an edge in the market and also trade on the right timeframe. The best way to know whether your strategy has an edge and the best timeframe for it is to backtest it on different timeframes. You may have to tweak some settings along the way.
Does Twiggs Money Flow work with forex or crypto markets?
The Twiggs Money Flow may not work with either forex or crypto markets because both markets may not have reliable volume data. Certainly, the spot forex market has no universal exchange and, hence, no harmonized volume data. It is almost the same with the crypto market — even though it has exchanges, it’s not clear if there’s a harmonized volume data per period for all the crypto exchanges.
Can Twiggs Money Flow be used with other technical indicators?
Yes, the Twiggs Money Flow be used with other technical indicators that complement it, especially moving averages and other trend indicators. Moving averages can be used to identify the trend so you look for Twiggs Money Flow signals only in the trend direction. This will reduce the frequency of false signals and improve the trading results.
How does the Twiggs Money Flow compare to the Chaikin Money Flow?
Compared to the Chaikin Money Flow, the Twiggs Money Flow is an improved version. Both try to estimate the money flow using the close location value and the volume data. However, the Chaikin Money Flow uses the closing price location relative to the current price bar’s range, while the Twiggs Money Flow uses the closing price location relative to the True Range so as to take care of gaps in the calculations.
Besides, the Twiggs Money Flow uses EMAs in its calculation rather than the cumulative sum over a given period used in the Chaikin Money Flow.
Can you trade profitably using only Twiggs Money Flow?
Whether you can trade profitably using only Twiggs Money Flow will depend on your strategy and the backtesting results. If you create a strategy that uses only the Twiggs Money Flow and your backtesting (and possibly forward-testing) results suggest that it is profitable, with a positive expectancy, who am I to say it won’t work?
However, combining the indicator with other technical analysis tools may offer a better edge.
What are the limitations of the Twiggs Money Flow indicator?
The limitations of the Twiggs Money Flow indicator include:
- It may not show you the direction of the trend unless you use a multi-timeframe analysis.
- Without the trend direction, it may be difficult to get an edge using it as a standalone indicator
- It cannot tell you how to manage your risk
How do professional traders use Twiggs Money Flow?
Professional traders use Twiggs Money Flow to create profitable trading strategies with an edge. Some of them also use it on a high timeframe, such as the monthly or weekly timeframe, as a selection tool to select the stocks to trade. Here, they use it to identify stocks with buying pressure for potential long positions and those with selling pressure for potential short positions.
Where can you learn more about Twiggs Money Flow?
You can learn more about Twiggs Money Flow from trading blogs, such as therobusttrader.com and quatifiedstrategies.com. IncredibleCharts may also have some good learning resources on the indicator since they introduced it to the market.
