The money flow index (MFI) is a momentum indicator that uses price and volume to measure buying and selling pressure. The MFI ranges from 0 to 100, with high values indicating strong buying pressure and low values indicating strong selling pressure.
The MFI is similar to other momentum indicators, such as the relative strength index (RSI) and the stochastic oscillator. Unlike RSI or stochastic, MFI also uses volume data to quantify buying and selling pressure.
Technical analyst Larry Williams developed the money flow index in the early 1980s. Williams used the MFI to trade commodities, but the indicator can be applied to any asset class.
How to calculate the money flow index
The money flow index is calculated using the following formula:
Positive money flow is equal to the typical price for the period multiplied by the volume for the period. Negative money flow is equal to the typical price for the period multiplied by the period’s volume.
Money flow is positive when the current period’s price is higher than the previous period, and vice versa for negative money flow.
Using the money flow index
The MFI is a momentum indicator used to identify trends, overbought and oversold conditions, and divergences between the MFI and price action.
MFI values above 80 are considered overbought, indicating that prices could pull back. MFI values below 20 are considered oversold and may indicate a potential rebound.
Divergences between the MFI and price can be used to identify potential reversals.
A bullish divergence occurs when the MFI forms higher lows while price action forms lower lows. This indicates that selling pressure is weakening, and a reversal to the upside may be imminent.
A bearish divergence occurs when the MFI forms lower highs while price action forms higher highs. This indicates that buying pressure is weakening, and a reversal to the downside may be imminent.
The money flow index can be used as a standalone indicator or in conjunction with other technical indicators. The MFI can help confirm trends and reversals when used with other indicators.
What is a good money flow index reading?
Interpretation of the money flow index depends on whether the MFI is rising or falling and each investor’s trading strategy.
If the MFI is rising, money is flowing into the stock and may be a bullish signal. If the MFI is falling, money is flowing out of the stock and is typically considered a bearish signal.
MFI vs. other momentum indicators
There are a few different momentum indicators that technical analysts use to predict future price movements, including the relative strength index (RSI), moving average convergence divergence (MACD), and stochastics.
RSI is a technical indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a security.
MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices.
Stochastics is a momentum indicator that measures the rate of change in closing price over time.
So, how does MFI differ? MFI is a momentum indicator that measures the flow of money in and out of a security by dividing the total amount of money flowing into a security by the difference between the amount of money flowing into the security and the amount of money flowing out of the security.
This measures whether money is flowing into or out of a security and whether this flow is increasing or decreasing.
MFI can identify overbought or oversold conditions, just like RSI and Stochastics. However, MFI also considers the volume of trading in a security, which RSI and Stochastics do not, which potentially makes MFI a more accurate tool for identifying potential turning points in the price of a security.