The Money Flow Index uses price and volume to identify oversold and overbought signals. It’s also used to identify divergences that indicate a trend change in price that may be coming.
This oscillator moves between a minimum of 0 and a high of 100. Once the MFI is over 80, it’s considered overbought. If it’s below 20, it’s oversold.
Calculating Money Flow Index
In these calculations, the following symbols are used:
- MF = Money flow index
- TP = typical price for the period that you’re evaluating
- MR = Money ratio
- NMF = Negative money flow
- PMF = Positive money flow
The calculation of Money Flow Index occurs in several stages, so you’ll have to use numerous formulae:
TP = (HIGH + LOW + CLOSE)/3
MF = TP * VOLUME
MR = Positive Money Flow (PMF)/Negative Money Flow (NMF)
MFI = 100 – (100 / (1 + MR))
In trading, comparing prices gives an idea of whether there’s a trend and what direction that trend is taking.
If today’s typical price is bigger than yesterday’s, you’ll have a positive Money Flow Index. However, when today’s typical price is lower, the money flow is negative. Money flow is always evaluated over a selected period of time, to determine whether it’s positive or negative.