Money Flow Index

This is a technical indicator that is used to measure the buying and selling pressure on stocks. The Money Flow Index (MFI) is also used to identify the potential trend reversals, or the overbought and oversold conditions of the security as well as generating trading signals.

How is MFI calculated?

Traders can calculate MFI using both price and volume data. This indicator is a momentum oscillator and is similar to the Relative Strength Index (RSI) and also oscillates between 0 and 100. It is important to calculate the positive and negative money flow to calculate MFI. The calculation of MFI uses the concept of the average price or the typical price which is the sum of the high, low, and close prices of the security divided by three.

A positive MFI is calculated as the sum of the typical price that is multiplied by the volume of days when the typical price is above the previous day’s typical price. On the other hand, a negative MFI is calculated as the sum of the typical price multiplied by the volume of days when the typical price is below the previous day’s typical price.

How to interpret the MFI?

After calculating the positive and negative money flow, traders need to divide the positive MFI by the negative money flow. The resultant number is transformed into an oscillator that ranges between 0 and 100. The MFI is considered to be overbought when the resultant number is above 80 and it is considered to be oversold when the resultant number is below 20. Traders can interpret the movement from the overbought to an oversold level or vice versa as a potential trend reversal.