Money Flow Index

Money Flow Index is a technical indicator invented by Gene Quong and Avrum Soudack. It is similar to the Relative Strength Index (RSI) and fits into the momentum indicator category. Traders can use both volumes and prices of a given instrument to predict the trends and also to measure the strength of the money that goes into it and withdraws from it. Overbought/Oversold levels can be used to find potentials reversals.

Calculation

There are the following steps to calculate Money Flow Index:

Typical Price = (High + Low + Close)
3

Money Flow = Typical price x Volume

Money Ratio = Positive Money Flow
Negative Money Flow

Money Flow Index = 100 - 100
1 + Money Ratio

Money Flow is positive when the typical price rises and negative when the typical price decline

Signals

Money Flow Index indicator’s chart has two horizontal lines that represent the 20% and 80% levels.

  • When the MFI line is below 20 it is in the oversold area and hence it is better to look for buying opportunities.
  • When the MFI line is above 80 it is in the overbought area so look for selling signals