The Money Flow Index (MFI) is a momentum indicator that tracks the inflow and outflow of money in a security over a set time period. On a typical trading day, you might have to analyse price movement for over a hundred different companies in a variety of global businesses as part of your routine. Thankfully, economists have created several tools to make this process easier for traders.
One such tool is the Money Flow Index (MFI) which serves as a valuable tool for traders seeking to understand market sentiment and identify potential trend changes.
What is the Money Flow Index (MFI)?
The Money Flow Index (MFI) is a volume-weighted technical indicator that combines price and volume to identify overbought or oversold conditions. Ranging from 0 to 100, it helps spot trend reversals and market divergences, offering deeper insights than traditional tools like RSI. Traders often refer to it as the volume-weighted version of RSI.
How to calculate the Money Flow Index?
The Money Flow Index (MFI) is a momentum-based indicator that uses both price and volume to measure the buying and selling pressure of a security over a specific period. Here’s how to calculate it step-by-step:
Step 1: Calculate the Typical Price
This gives a simple average of the day's price movement.
Formula:
Typical Price = (High + Low + Close) ÷ 3
Step 2: Determine Positive or Negative Money Flow
· If today’s Typical Price is higher than yesterday’s → Positive Money Flow
· If lower → Negative Money Flow
Step 3: Calculate Raw Money Flow
Raw Money Flow = Typical Price × Volume
Repeat this for each of the past 14 periods.
Step 4: Calculate Money Ratio
Add all Positive Money Flows over 14 periods and divide by the sum of Negative Money Flows:
Money Ratio = 14-period PMF ÷ 14-period NMF
Step 5: Use the MFI Formula
Now, plug the Money Ratio into this formula:
MFI = 100 – [100 ÷ (1 + Money Ratio)]
Interpreting MFI
- Above 70 = Overbought zone
- Below 30 = Oversold zone
You can adjust these levels based on the asset’s behaviour or market volatility.