Understanding the Money Flow Index
You know how they say money talks in everyday life? In the markets, it practically screams. While you might just watch prices, tracking the money flow can uncover shifts that price alone hides. That's what the Money Flow Index, or MFI, does—it looks at both price changes and the volume behind them to gauge real investor conviction.
For instance, if prices are climbing with rising volume, the MFI confirms solid buying interest. But if prices rise while MFI lags, it's a sign the upmove might not last. Readings over 80 often mean the market's overbought and due for a pullback, while under 20 suggests oversold territory where buyers could jump in.
Key Takeaways
- The MFI combines price and volume for a better view of market sentiment than price-only tools.
- Extreme readings above 80 or below 20 can highlight trading opportunities from market shifts.
- Divergences between MFI and price warn of possible reversals early on.
- Use MFI to time trades in trends, like buying dips below 40 in uptrends or selling rallies above 60 in downtrends.
What Is the Money Flow Index?
The MFI isn't some complex beast; its calculation is straightforward. Start with the typical price for each period: average the high, low, and close. Then compare it to the prior period—if it's up, money's flowing in positively; if down, it's negative.
Multiply that typical price by volume to get raw money flow, and track positives and negatives over 14 periods. Sum them up, divide positives by negatives for the money flow ratio, and plug it into the formula to get your MFI on a 0-100 scale. Update it with each new period using the latest 14 days.
This mix of price and volume weights moves by how much money is involved, showing true market conviction where direction alone falls short.
Calculating the MFI
Here's the precise breakdown: Money Flow Index = 100 - (100 / (1 + Money Flow Ratio)), where Money Flow Ratio = (14 Period Positive Money Flow) / (14 Period Negative Money Flow). Raw Money Flow = Typical Price * Volume, and Typical Price = (High + Low + Close) / 3.
Positive raw money flow adds to the positive total when price rises period-over-period; negative when it falls. This tracks net money direction over time.
How To Interpret the MFI's Signals
Divergences are where MFI shines—when it moves opposite to price, it often predicts reversals. Say a stock hits new highs but MFI doesn't; that means buying is fading, and a drop could follow as big players sell off.
Conversely, if prices make lower lows but MFI higher ones, selling might be exhausting, setting up a bounce. Extreme readings work as alerts too: over 80 is overbought, under 20 oversold, but watch 90+ or 10- for even stronger signals of unsustainable moves.
In trends, look for MFI pullbacks to 40 in uptrends for buys, or pushes to 60 in downtrends for shorts. Wait for MFI to reverse at those levels for confirmation.
MFI vs. RSI: What's the Difference?
MFI and RSI both oscillate 0-100, spot overbought/oversold, and highlight divergences. But RSI just measures price speed and change, while MFI adds volume to weigh the force behind those changes.
This makes MFI better at confirming trends when price and volume align, and it can signal reversals earlier since volume often leads price. They sync in steady trends, but MFI's edge shows in transitions where volume reveals hidden accumulation or distribution.
A Word of Caution
MFI isn't foolproof—it can give false signals in strong trends where overbought or oversold lasts longer than you expect. Selling at 80 or buying at 20 might cut you out of profits if the trend powers on.
The Bottom Line
Ultimately, MFI lets you check the real backing behind price moves by blending in volume. It spots reversals via extremes and divergences that pure price indicators overlook. Pair it with other analysis for the best results, as no tool stands alone.
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