How the money flow index

and relative strength index

differ
Brian Beers

The money flow index (MFI) represents the

volume-weighted adaptation of the more
widely used relative strength index (RSI).
The RSI tracks market momentum through
the speed and change in price movements,
in contrast to the MFI that more carefully
watches buying and selling pressure based
on trading volume fluctuations.

Differences in MFI and RSI

Tracking
The RSI has become very popular among
traders and technical analysts. Typically
charted over a 14-day look-back period, the
RSI is both range-bound and smoothed,
making interpretations straightforward and
easy to combine with other indicators. The
basic building blocks of the RSI formula are
the average gains and average losses within
a security's price changes.

The formula for the MFI, on the other hand,

uses a typical price and compares it with
several different evaluations of money flows
in and out of the security. Based on the
theory that volume precedes price, the MFI
acts as a more ambitious leading indicator
than the RSI. Notably, 14-day periods are
also the default with the MFI.

Strengths of MFI and RSI

Both indicators are momentum oscillators,
though they are generally regarded to have
different strengths.

Many traders consider the RSI to be more

reliable in showing bull and bear trends
using its center line, spotting divergences
and overbought/oversold conditions when
contrasted with price action. The MFI (as a
stronger leading tool) more consistently
leaves traditional price action and is best
suited to spot reversals and failed signals.
Divergences are more serious with the MFI,
which introduces volume to magnify the
difference between trend strength and price
perception.

Despite their similarities, the MFI and the

RSI can actually be used in conjunction to
confirm signals. The MFI is less of a
traditional oscillator, and its underlying
formula is largely based on volume, sharing
almost none of the average price movement
biases of its cousin.