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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)),

Where:
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)

 

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