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Indicators: Money Flow Index (MFI)

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Automated-Trading
Admin
100933
Automated-Trading 2009.12.29 10:33 

Money Flow Index (MFI):

Money Flow Index (MFI) is the technical indicator, which indicates the rate at which money is invested into a security and then withdrawn from it.  Construction and interpretation of the indicator is similar to Relative Strength Index with the only difference that volume is important to MFI.

When analyzing the money flow index one needs to take into consideration the following points:

  • Divergences between the indicator and price movement. If prices grow while MFI falls (or vice versa), there is a great probability of a price reversal;
  • Money Flow Index value, which is over 80 or under 20, signals correspondingly of a potential peak or bottom of the market.

    Money Flow Index indicator

Author: MetaQuotes Software Corp.

Sergey Golubev
Moderator
94528
Sergey Golubev 2014.02.24 12:50  

Money Flow Index (adapted from barchart article)

The Money Flow Index (MFI) is a momentum indicator that is similar to the Relative Strength Index (RSI) in both interpretation and calculation. However, MFI is a more rigid indicator in that it is volume-weighted, and is therefore a good measure of the strength of money flowing in and out of a security. It compares "positive money flow" to "negative money flow" to create an indicator that can be compared to price in order to identify the strength or weakness of a trend. Like the RSI, the MFI is measured on a 0 - 100 scale and is often calculated using a 14 day period.

The MFI can be interpreted much like the RSI in that it can signal divergences and overbought/oversold conditions.

Positive and negative divergences between the stock and the MFI can be used as buy and sell signals respectively, for they often indicate the imminent reversal of a trend. If the stock price is falling, but positive money flow tends to be greater than negative money flow, then there is more volume associated with daily price rises than with the price drops. This suggests a weak downtrend that threatens to reverse as money flowing into the security is "stronger" than money flowing out of it.

As with the RSI, the MFI can be used to determine if there is too much or too little volume associated with a security. A stock is considered "overbought" if the MFI indicator reaches 80 and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and below suggests a stock is "oversold".


Calculation

The "flow" of money is the product of price and volume and shows the demand for a security and a certain price. The money flow is not the same as the Money Flow Index but rather is a component of calculating it. So when calculating the money flow, we first need to find the average price for a period. Since we are often looking at a 14-day period, we will calculate the typical price for a day and use that to create a 14-day average.

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

Money Flow = (Typical Price) x (Volume)

The MFI compares the ratio of "positive" money flow and "negative" money flow. If typical price today is greater than yesterday, it is considered positive money. For a 14-day average, the sum of all positive money for those 14 days is the positive money flow. The MFI is based on the ratio of positive/negative money flow (Money Ratio).

Money Ratio = (Positive Money Flow / Negative Money Flow)

Finally, the MFI can be calculated using this ratio:

Money Flow Index = 100 - [ 100 / (1 + Money Ratio) ]

The fewer number of days used to calculate the MFI, the more volatile it will be.

Parameters

  • Period (14) - the number of bars, or interval.
Barchart.com - Technical Chart Indicators and Studies
Barchart.com - Technical Chart Indicators and Studies
  • www.barchart.com
Symbols: Top Stocks Futures Markets My Stocks Find descriptions, formulas, parameters, and other help for the indicators and studies used by the Barchart.com Technical Charts application below. Technical Charts and Classic Charts each have their own set of studies. Interactive Charts, however...
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