Money Flow Index MFI
Money Flow Index (MFI) Indicator Purpose
Money Flow Index (MFI) is a momentum technical indicator developed to estimate the amount of money flowing into and out of a security. MFI indicator is similar to the relative strength index formula, but instead of measuring a security’s price action, it also takes into consideration the trading volumes.
Money Flow Index (MFI) Indicator Usage
Money Flow Index (MFI) uses price, volume and the concept of accumulation/distribution to identify overbought and oversold signs. Also MFI is helpful for confirming trends in prices and warning of potential reversals in prices.
Overbought and oversold areas are:
- Below 20 is considered oversold and the trader has BUY opportunities.
- Above 80 is considered overbought and the trader has SELL signals.
Divergence patterns analysis:
- Rising MFI along with decreasing prices indicates the downtrend may be weakening;
- Falling MFI along with growing prices specifies the uptrend may be weakening.
Money Flow Index (MFI) Indicator Calculation
The following steps are required to calculate the MFI indicator:
1. TP = (H + L + C) / 3;
2. MF = TP* Vol;
3. MR = Sum (MF+) / Sum (MF-);
MFI = 100 – (100 / (1 + MR)),
TP – typical price;
H – current high;
L – current low;
C – close price;
MF – money flow
- Positive Money Flow: The Money Flow on days where the Typical Price is greater than the previous day's Typical Price.
- Negative Money Flow: The Money Flow on days where the Typical Price is less than the previous day's Typical Price.
Vol. – volume;
MR – money ratio (Positive Money Flow / Negative Money Flow)