The Money Flow Index (MFI) is a momentum indicator which calculates the flow of money into and out of a stock ranging over a specified period of time. It is similar and related with the Relative Strength Index (RSI) but integrates volume with it, whereas the RSI only assumes the price. The MFI is calculated by accumulating positive and negative Money Flow values and then formulating a Money Ratio. The Money Ratio is normalized into the MFI oscillator form.
Oversold levels for stock price usually occur below 30 and overbought levels usually occur above 70. These levels can change depending on the diverse market conditions. Level lines should cut across the highest highs and the lowest lows. Oversold/Overbought levels should not be solely considered as buy/sell opportunities. Traders and Investors should consider some supportive technical analysis or research to affirm the stock’s reversals. While the trends are strong, the MFI can remain overbought or oversold for extended periods.
If the stock price makes a new high or low that is not confirmed by the MFI, this divergence can signal a price reversal.
Calculation of MFI
Typical Price = (High + Low + Close) / 3
Raw Money Flow = Typical Price x Volume
Money Flow Ratio = (14-period Positive Money Flow) / (14-period Negative Money Flow)
Money Flow Index = 100 – [100 / (1 + Money Flow Ratio)]
The Money Flow Index is a very unique indicator that combines momentum and volume with an RSI formula. RSI momentum generally favours the bulls when the indicator is above 50 and the bears when below 50. Even though MFI is considered a volume-weighted RSI, using the centreline to determine a bullish or bearish bias does not give good results. Instead, MFI is better adapted to identify potential reversals for overbought/oversold levels, bullish/bearish divergences and bullish/bearish failure swings. As with all indicators, MFI should not be used solely. A pure momentum oscillator, such as RSI, or pattern analysis can be combined with MFI to increase signal affirmation and robustness. Investors can use MFI on timeframes of weekly chart or monthly chart to make investments.