MFI - Money Flow Index

The Money Flow Index (MFI) is a momentum indicator showing the strength of a stock's trend and is similar to the Relative Strength Index (RSI) in terms of interpretation and calculation. The only difference is that MFI is a more complex indicator because it takes into the consideration the volume of shares traded giving a view of the flow of money into or out of a security. It is therefore a fairly good measure of the strength of money flowing in and out of a security. Hence the positive or negative flow of the money basically gives a view of the strength or weakness of a security. Just like RSI, MFI is measured on a scale of 0 to 100 and is popular period again is a 14 day period.

Calculation of MFI

The "flow" of money is the product of price and volume and shows the demand for a security and a certain price. Money Flow Index is a component of calculating the money flow. So while calculating the money flow, the average price for a period is required. Frequently a 14-day period is used hence an example of 14 day average is considered.

Price (A) = (High + Low + Close of the Day) / 3

Money Flow = Price x Volume

The MFI compares the ratio of "positive" money flow and "negative" money flow. Hence if Price (A) 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

The MFI can now be derived using the above ratio and is defined as :

Money Flow Index = 100 – (100/(1+Money Ratio))

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

  Interpretation and Use of MFI in technical Analysis

Basically MFI helps in identifying the divergences and oversold and overbought positions of a security

Positive Divergence between the stock and MFI can be utilized as a probable buy signal and Negative Divergence between the stock and MFI can be utilized as a probable sell signal.

Just like RSI, the MFI can be used to determine if there is too much or too little volume associated with a particular security. A stock is considered "overbought" if the MFI indicator reaches 80 and above (a bearish signal). An exit at this level would be suggested by a technical analyst. A bullish reading of 20 and below suggests a stock is "oversold" (a bullish signal). An entry at this level would be suggested by a technical analyst.