What is the Money Flow Index?

The Money Flow Index (MFI) is a technical indicator, which uses an asset’s volume and price data to identify oversold and overbought signals. The oscillator is also applied to find out divergences, which are capable of warning traders of a possible change in the asset’s price.

Unlike other popular oscillators, such as the RSI, or the Relative Strength Index, the Money Flow Index not only analyses price data, but also incorporates volume data. That is why the MFI is sometimes called the volume-weighted RSI.

Money Flow Index calculation

There are several steps to calculate the index.

Typical price calculation. The typical asset’s price for each day is the average of the high, the low and the closing price.
Positive and negative money flows. The money flow is calculated as the typical price multiplied by volume on a particular day. The raw money flow is positive, when the typical price increases from the previous period and is negative, when the typical price decreases.
Money ratio calculation. The money ratio is calculated as the ratio of positive and negative money flows.
Money Flow Index calculation. Finally, the Money Flow Index formula looks as follows:

Money Flow Index explained

The MFI, Money Flow Index oscillator, moves in a range of 0-100. When the MFI rises above 80, the asset is considered entering into overbought territory. When the MFI reading is below 20, the asset is considered oversold, with 90 and 10 used as thresholds.

What does it mean? The oversold and overbought levels are used to signal emerging trading opportunities. The indicator’s moves below 10 and above 90 happen rather seldom. Traders usually watch for the Money Flow Index to return to above 10 to start a long trade, and to fall below 90 to initiate a short trade.

The moves within the overbought and oversold territory could be also helpful. If the price of an asset moves in an uptrend, a decrease below 20 or 30 and a subsequent rise above these levels could be a signal that the pullback is over and the uptrend continues.

The same is true about the downtrend. A short push up to 70 or 80 and the following return below these levels could indicate that it’s time to enter a short trade in anticipation of another drop in the asset’s price.

A divergence between the asset’s price and the indicator readings is also noteworthy. If the price is still falling and the indicator is rising (and vice versa), it means that the price could reverse soon.