MFI

Back to the List of Studies

Patent #: US 7,831,984 B2
MarketVolume®'s technology of displaying and presenting intraday volume and volume based technical indicators is protected by copyright law and patent. Unauthorized distribution or reproduction of proprietary technologies will be prosecuted to the maximum extent possible under the law.

The MFI (Money Flow Index) is a momentum technical indicator which could be compared to RSI (Relative Strength Index) in both calculation and interpretation. However, since MFI is a volume-based indicator it could be used in technical analysis to measure the strength of money flow in and out of a security, index and market. The principle of MFI calculation is a comparison of "positive money flow" to "negative money flow". The same as RSI, the MFI scale is between 0 and 100. 14-bar period is the most commonly used period setting for MFI daily chart.

Calculation of the Money Flow Index could be divided into several stages

1.  The MFI formula is based on the price and volume which are used to calculate Money Flow (MF). In order to calculate Money Flow first of all the "Typical Price" should be defined:
   
   Typical Price = ( (Day High + Day Low + Day Close) / 3)
    
2.  Money Flow formula is based on the volume and price:
   
   Money Flow = (Typical Price) x (Volume)
    
3. Next step is to compare positive money and negative money. We have positive money when a typical price of the current bar is greater than the previous bar typical price. If the previous bar typical price is greater than the current bar typical price, then we have negative money. For a 14-bar average, the sum of all positive money for those 14 bars is the positive money flow and the sum of all negative money is the negative money flow. To compare positive and negative money flow we have to calculate Money Ratio:.
   
   Money Ratio = (Positive Money Flow / Negative Money Flow)
    
4.  The last step is to turn Money Ratio values into the indicator which would run in the scale between 0 and 100:
   
   Money Flow Index = 100 - (100 / (1 + Money Ratio))
    

The Money Flow Index can be interpreted much like the RSI and other volume based technical indicators by looking at divergences which may signal possible trend reversal.

The same as with RSI, MFI can be used to define overbought/oversold conditions where a stock (index) is considered "overbought" if the MFI runs above 80 and "oversold" if MFI drops below 20.

Positive and negative divergences between the stock (index) moving average and the MFI can be used as buy and sell signals respectively. If the price moving average still declines (we have downtrend), yet MFI started to move up it signals that there is more volume associated with price advance than with the price decline. This indicates a weak downtrend and a possible change in the market sentiment which may lead to a trend reversal.

Chart 1: S&P 500 index - Money Flow Index

The MFI could be considered as price and volume based technical indicator and the best results could be achieved when it is applied to indexes (NASDAQ 100, S&P 500, DJI, NYSE and other). The index analysis could be used to trade index derivatives, such as QQQQ, DIA and SPY, options on indexes, index emini futures, options on index derivatives as well as it could be used to trade stocks from the index basket that move along with their index.

Start using our Professional Charts
and Make Money with our System!

Sign up for a Free Trial Now!
(credit card not required)