Money Flow Index (MFI)

The money flow index (MFI) is a momentum indicator that calculates the flow of money into and out of a security over a fixed period of time. It has a range of 0 to 100. It’s a technical oscillator that looks at price and volume data to see whether an asset is overbought or oversold. The MFI is likewise called volume-weighted Relative Strength Index (RSI), as it incorporates volume, in contrast to RSI, which just consolidates cost. The MFI is determined by adding up positive and negative Money Flow values, then dividing by the number of positive and negative Money Flow values.

Positive cash stream is demonstrated by an increment in regular value, flagging purchasing pressure, while a decline in average cost shows a negative cash stream, in this way flagging a selling pressure. Overbought is defined as a reading above 80, and oversold is defined as a reading below 20, while levels of 90 and 10 are often used as thresholds. The money ratio is used to calculate the MFI, which ranges from 0 to 100. Since the MFI includes volume, it can be used to identify price extremes and reversals with a variety of signals.

Example of Money Flow Index (MFI)

Calculate the money flow index (MFI):

MFI = 100 – 100 / 1 + money ratio

The money flow index can be expressed equivalently as follows:

MFI = 100 × positive money flow / positive money flow + negative money flow

This form depicts the MFI as a percentage of positive money flow relative to overall money flow. Raw Money Flow is positive as prices advance from one time to the next, and it is added to Positive Money Flow. Raw Money Flow is applied to Negative Money Flow when it is negative due to a price drop during that time.

Money Flow Index (MFI) can also be calculated using the following steps:

Compute the typical price for a period.

Typical Price = (Low + High + Close) / 3

If today’s average price is higher than yesterday’s, there is a positive money flow. If the typical price is lower, the money flow is negative. Positive money flow results from the accumulation of positive money over time, while negative money flow results from the accumulation of negative money over time.

Compute the raw money flow.

Raw Money Flow = Volume x Typical Price

Compute the money ratio.

Money Ratio = 14-period Positive Money Flow / 14-period Negative Money Flow

One of the essential approaches to utilize the Money Flow Index is when there is a uniqueness. A disparity is the point at which the oscillator is moving the other way of cost. This is a sign of a possible inversion in the common value pattern. MFI is utilized to quantify the “excitement” of the market. As such, the cash stream list shows how much a stock was exchanged. A value of 80 or more is considered overbought, whereas a value of 20 or less is considered oversold. Divergences between MFI and price activity are also noteworthy; for example, if price makes a new rally high but the MFI high is lower than the previous high, this may suggest a poor advance that is likely to reverse.

Merchants additionally watch for bigger divergences utilizing various waves in the cost and MFI. For instance, a stock tops at $10, pulls back to $8, and afterward energizes to $12. The cost has made two progressive highs, at $10 and $12. In the event that MFI makes a lower higher when the value comes to $12, the marker isn’t affirming the new high. This may be a hint of a price drop. The MFI is designed in the same way as the relative strength index (RSI). The scale, i.e., what is collected on those days, for the MFI is volume (or dollar volume estimate rather than price change amounts), while for the RSI it is price change amounts.

Overbought and oversold levels are also used to alert traders to potential trading opportunities. It’s unusual to see moves below 10 and above 90. Traders look for the MFI to rise above 10 to signify a long trade, and to fall below 90 to indicate a short trade. If the MFI shows a rapid price rise to a high level, the protection would be considered overbought. Likewise, a security is considered oversold if the MFI shows a fast decrease in the cost to an impressively low level. The oversold and overbought levels are useful in the ID of value limits.

To assess market support and resistance levels, the money flow index can and should be combined with price indicators such as moving averages or trend lines. Traders can pinpoint the most accurate entries and exits by combining a price indicator and a momentum indicator. For the most part, overbought conditions happen if the MFI is over 80, and under 20 MFI shows oversold conditions. The costs may keep on rising while the upward pattern is solid, and the MFI can increment past 80.

On the other hand, if prices continue to fall in the face of a strong downward trend, MFI could fall below 20. When the MFI rises above 90, it is considered truly overbought, and when it falls below 10, it is considered truly oversold. The key difference is that the MFI takes volume into account, while the RSI does not. Advocates of volume investigation trust it is a main pointer. In this way, they likewise accept that MFI will give signals, and caution of potential inversions, in a more convenient design than the RSI.

Bullish money flow index (MFI) divergence occurs when the price makes a new low, but the MFI shows a higher low, suggesting a rise in money flow. It means that the selling pressure is easing and that the market will be taken over by buyers. It offers an opportunity to purchase securities at a low rate. The MFI is fit for delivering bogus signs. This is the point at which the pointer accomplishes something that shows a decent exchanging opportunity is available, yet then the cost doesn’t move true to form bringing about a losing exchange.

When the price moves to a new high while the MFI shows a lower high, this is known as bearish money flow index (MFI) divergence. It denotes a drop in buyer pressure and the beginning of the seller’s market takeover. It is a profitable opportunity for sellers. It’s also possible that the predictor would miss something crucial. For instance, while a divergence can cause a price reversal in some cases, it will not be present in all price reversals. As a result, traders should diversify their research and risk management rather than relying solely on one metric.

Information Sources:

  1. investopedia.com
  2. corporatefinanceinstitute.com
  3. wikipedia