Money Flow Index (MFI)

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:

1. MF = Money flow index
2. TP = typical price for the period that you’re evaluating
3. MR = Money ratio
4. NMF = Negative money flow
5. PMF = Positive money flow

Formulae

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.