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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).