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Money Flow Index
Description
The Money Flow Index (MFI) attempts to measure the strength
of money flowing in and out of a security. It is closely related to
the Relative Strength Index;
however, the Money Flow Index accounts for volume action. The RSI
incorporates price action only.
Money flow (not the Money Flow Index) is calculated by determining
the average price for the day and then comparing this figure to the
previous day's average price. If today's average price is greater,
it is considered positive money flow. If today's average price is
less, it is considered negative money flow. Money flow for a
specific day is calculated by multiplying the average price by the
volume.
Positive Money Flow is the sum of the positive money flow over
the specified number of periods. Negative Money Flow is the sum of
the negative money flow over the specified number of periods.
Finally, the Money Flow Index is calculated using the following
formula:
Interpretation
The interpretation of the Money Flow Index is as follows:
- Look for divergence/failure swings between the indicator and
the price action. If the price trends higher (lower) and the MFI
trends lower (higher), then a reversal may be imminent.
- Look for market tops to occur when the MFI is above a specific
level (e.g., 80). Look for market bottoms to occur when the MFI is
below a specific level (e.g., 20).
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