Money Flow Index - MFI Definition and Uses

The Money Flow Index (MFI) is a technical oscillator that uses price and volume data for identifying
overbought or oversold signals in an asset. It can also be used to spot divergences which warn of a
trend change in price. The oscillator moves between 0 and 100.
Unlike conventional oscillators such as the Relative Strength Index (RSI), the Money Flow Index
incorporates both price and volume data, as opposed to just price. For this reason, some analysts
call MFI the volume-weighted RSI.
KEY TAKEAWAYS
• The Money Flow Index (MFI) is a technical indicator that generates overbought or oversold
signals using both prices and volume data.
• An MFI reading above 80 is considered overbought and an MFI reading below 20 is
considered oversold, although levels of 90 and 10 are also used as thresholds.
• A divergence between the indicator and price is noteworthy. For example, if the indicator is
rising while the price is falling or flat, the price could start rising.

The Formulas for the Money Flow Index Are:

Money Flow Index=100−1+Money Flow Ratio100
where:
Money Flow Ratio=14 Period Negative Money Flow/14 Period Positive Money Flow
Raw Money Flow=Typical Price * Volume
Typical Price=3High + Low + Close
When the price advances from one period to the next Raw Money Flow is positive and it is added
to Positive Money Flow. When Raw Money Flow is negative because the price dropped that
period, it is added to Negative Money Flow.
How to Calculate the Money Flow Index
There are several steps for calculating the Money Flow Index. If doing it by hand, using a
spreadsheet is recommended.
 • Calculate the Typical Price for each of the last 14 periods.
• For each period, mark whether the typical price was higher or lower than the prior period.
This will tell you whether Raw Money Flow is positive or negative.
• Calculate Raw Money Flow by multiplying the Typical Price by Volume for that period. Use
negative or positive numbers depending on whether the period was up or down (see step
above).
• Calculate the Money Flow Ratio by adding up all the positive money flows over the last 14
periods and dividing it by the negative money flows for the last 14 periods.
• Calculate the Money Flow Index (MFI) using the ratio found in step four.
• Continue doing the calculations as each new period ends, using only the last 14 periods of
data.
What Does the Money Flow Index Tell You?
One of the primary ways to use the Money Flow Index is when there is a divergence. A divergence
is when the oscillator is moving in the opposite direction of price. This is a signal of a potential
reversal in the prevailing price trend.
For example, a very high Money Flow Index that begins to fall below a reading of 80 while the
underlying security continues to climb is a price reversal signal to the downside. Conversely, a very
low MFI reading that climbs above a reading of 20 while the underlying security continues to sell
off is a price reversal signal to the upside.
Traders also watch for larger divergences using multiple waves in the price and MFI. For example,
a stock peaks at $10, pulls back to $8, and then rallies to $12. The price has made two successive
highs, at $10 and $12. If MFI makes a lower higher when the price reaches $12, the indicator is not
confirming the new high. This could foreshadow a decline in price.
The overbought and oversold levels are also used to signal possible trading opportunities. Moves
below 10 and above 90 are rare. Traders watch for the MFI to move back above 10 to signal a long
trade, and to drop below 90 to signal a short trade.
Other moves out of overbought or oversold territory can also be useful. For example, when an
asset is in an uptrend, a drop below 20 (or even 30) and then a rally back above it could indicate a
pullback is over and the price uptrend is resuming. The same goes for a downtrend. A short-term
rally could push the MFI up to 70 or 80, but when it drops back below that could be the time to
enter a short trade in preparation for another drop.
The Difference Between the Money Flow Index and the Relative Strength Index (RSI)
The MFI and RSI are very closely related. The main difference is that MFI incorporates volume,
while the RSI does not. Proponents of volume analysis believe it is a leading indicator. Therefore,
they also believe that MFI will provide signals, and warn of possible reversals, in a more timely
fashion than the RSI. One indicator is not better than the other, they are simply incorporating
different elements and will, therefore, provide signals at different times.
Limitations of the Money Flow Index
The MFI is capable of producing false signals. This is when the indicator does something that
indicates a good trading opportunity is present, but then the price doesn't move as expected
resulting in a losing trade. A divergence may not result in a price reversal, for instance.
The indicator may also fail to warn of something important. For example, while a divergence may
result in a price reversing some of the time, divergence won't be present for all price reversals.
Because of this, it is recommended that traders use other forms of analysis and risk control and
not rely exclusively on one indicator.