Money Flow Index – MFI Definition and Uses

What Is the Money Flow Index (MFI)?

The Money Flow Index (MFI) is a technical oscillator that uses price and amount wisdom for understanding overbought or oversold signs in an asset. It’ll even be used to spot divergences which warn of a construction change in price. The oscillator moves between 0 and 100.

Against this to straightforward oscillators such for the reason that Relative Energy Index (RSI), the Money Flow Index incorporates each and every price and amount wisdom, as opposed to merely price. As a result of this, some analysts title MFI the volume-weighted RSI.

The Formula for the Money Flow Index Are:


$\begin{array}{cc}& \text{Money Flow Index}=100-\frac{100}{1+\text{Money Flow Ratio}}\\ & \text{where:}\\ & \text{Money Flow Ratio}=\frac{\text{14 Duration Positive Money Flow}}{\text{14 Duration Adverse Money Flow}}\\ & \text{Raw Money Flow}=\text{Typical Price * Amount}\\ & \text{Typical Price}=\frac{\text{Best + Low + Close}}{3}\end{array}$

get started{aligned} &text{Money Flow Index}=100-frac{100}{1+text{Money Flow Ratio}} &textbf{where:} &text{Money Flow Ratio}=frac{text{14 Duration Positive Money Flow}}{text{14 Duration Adverse Money Flow}} &text{Raw Money Flow}=text{Typical Price * Amount} &text{Typical Price}=frac{text{Best + Low + Close}}{3} end{aligned} ​Money Flow Index=100−1+Money Flow Ratio100​where:Money Flow Ratio=14 Duration Adverse Money Flow14 Duration Positive Money Flow​Raw Money Flow=Typical Price * AmountTypical Price=3Best + Low + Close​​

When the price advances from one period to the next Raw Money Flow is bound and it is added to Positive Money Flow. When Raw Money Flow is adversarial given that price dropped that period, it is added to Adverse Money Flow.

Learn how to Calculate the Money Flow Index

There are a selection of steps for calculating the Money Flow Index. If doing it via hand, the use of a spreadsheet is truly helpful.

1. Calculate the usual price for each of the general 14 categories.
2. For each period, mark whether or not or now not the usual price was once higher or less than the prior period. This will sometimes allow you to know whether or not or now not raw money waft is bound or adversarial.
3. Calculate raw money waft via multiplying the usual price via amount for that period. Use adversarial or positive numbers depending on whether or not or now not the period was once up or down (see step above).
4. Calculate the money waft ratio via together with up all the positive money flows right through the closing 14 categories and dividing it in the course of the adversarial money flows for the general 14 categories.
5. Calculate the Money Flow Index (MFI) the use of the ratio found in step 4.
6. Continue doing the calculations as each new period ends, the use of best the general 14 categories of knowledge.

What Does the Money Flow Index Tell You?

One of the vital an important primary tactics to use the Money Flow Index is when there is a divergence. A divergence is when the oscillator is moving within the fallacious approach of price. This is a signal of a conceivable reversal inside the prevailing price construction.

For example, an excessively most sensible Money Flow Index that begins to fall underneath a finding out of 80 while the underlying protection continues to climb is a value reversal signal to the drawback. Conversely, an excessively low MFI finding out that climbs above a finding out of 20 while the underlying protection continues to dump is a value reversal signal to the upside.

Patrons moreover sit up for higher divergences the use of multiple waves in the price and MFI. For example, a stock peaks at $10, pulls once more to $8, and then rallies to $12. The price has made two successive highs, at $10 and $12. If MFI makes a lower higher when the price reaches $12, the indicator is not confirming the new most sensible. This is in a position to foreshadow a decline in price.

The overbought and oversold levels are also used to signal possible purchasing and promoting choices. Moves underneath 10 and above 90 are unusual. Patrons sit up for the MFI to move once more above 10 to signal a longer trade, and to drop underneath 90 to signal a temporary trade.

Other moves out of overbought or oversold territory can also be useful. For example, when an asset is in an uptrend, a drop underneath 20 (or even 30) and then a rally once more above it could indicate a pullback is over and the price uptrend is resuming. The identical goes for a downtrend. A short lived-term rally might push the MFI up to 70 or 80, but when it drops once more underneath that can be the time to enter a temporary trade in preparation for each different drop.

The Difference Between the Money Flow Index and the Relative Energy Index (RSI)

The MFI and RSI are very sparsely identical. The primary difference is that MFI incorporates amount, while the RSI does not. Proponents of amount analysis believe it is a major indicator. Because of this truth, moreover they believe that MFI will provide signs, and warn of possible reversals, in a further neatly timed fashion than the RSI. One indicator is not upper than the other, they are simply incorporating different elements and will, because of this truth, provide signs at different events.

Limitations of the Money Flow Index

The MFI is in a position to producing false signs. This is when the indicator does something that indicates a good purchasing and promoting choice is supply, alternatively then the price does now not switch as expected resulting in a losing trade. A divergence may not result in a value reversal, for example.

The indicator may also fail to warn of 1 factor important. For example, while a divergence would possibly result in a value reversing some of the time, divergence might not be supply for all price reversals. Because of this, it’s endorsed that buyers use several types of analysis and risk control and not rely totally on one indicator.