MFI - Money Flow Index
Category: Volume momentum indicator
Definition
The Money Flow Index (MFI) is a momentum indicator. The MFI is in terms of signals similar to the calculation and RSI is the Money Flow Index, however, more specifically because of the fact that it also has volume-weighted. The Money Flow Index clearly shows whether money is flowing into or out of a stock and thus indirectly or powerful or just a current trend is weakening.
Money Flow Index Signals
The MFI index moves between 0 and 100 and is often used for overbought / oversold conditions, and volume divergences compared to the current trend.
Money Flow Index Overbought / oversold
If the MFI is above 80 then increases the share in an overbought situation. There is too much volume compared to the average upward. The risk of profit-taking is increasing rapidly, as the volume again by the same door to go outside the price drops. This situation also applies vice versa. A decrease in the MFI is below 20 share in the oversold zone correctly. The following illustration shows 2 peaks and 1 soil in the MFI directly coincide with 2 tops and 1 bottom in the price chart.
Divergences
Divergences often indicate that the trend will soon change. If the share eg reduced soil converts but the MFI higher bottoms turn this indicates that more volume is rising on positive days than negative volume on declining days. This indicates a weakening of the declining trend since the time soon comes to the larger volume upward will prevail on the falling volume.
MFI indicator (tops and bottoms) in ProRealTime
Figure 1: MFI indicator in the U.S. share of Wal-Mart (overbought-oversold)
Calculating MFI
The MFI is calculated over (n) periods, often this is standard 14 periods. The MFI is composed of a set of sub-formulas.
A) First, calculate the average rate for a period: (High + Low + Last Price) / 3
B) Money Flow = average rate of the period (from A) * Volume
C) Calculate for each period from (n) steps A and B:
Add the result to the "Positive Money Flow (PMF)" if the middle rate higher than the previous average rate or add the result to the 'Negative Money Flow (NMF)' as the average rate is lower than the previous fixing.
D) We can now calculate the Money Ratio: MR = PMF / NMF
E) The Money Flow Index = 100 - (100 / (1 + MR))
The fewer the number of selected periods (n) the more volatile the indicator.
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