Money Flow Index (MFI)

The Money Flow Index (MFI) is a momentum oscillator that tracks the strength of money flowing into and out of a security over a defined period.
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Money Flow Index (MFI)
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3 mins read
23-June-2025

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.

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Advantages of calculating the Money Flow Index

  1. Identification of overbought and oversold conditions: MFI, like other momentum oscillators, helps traders identify probable overbought and oversold situations in a particular security. values below 30 suggest that the asset is oversold, while values above 70 frequently point to overbought situations.
  2. Trend confirmation: In certain situations, MFI is used to support trends that have been detected by other technical indicators or chart patterns. For example, when a security's price is rising and MFI is steadily rising, this could be interpreted as evidence that the uptrend is robust.
  3. Volume inclusion: By combining price and volume information, MFI offers a thorough understanding of market sentiment. This could also aid in determining how powerful price movements are, as large price changes supported by larger volumes would be given more weight than those that occurred during a period of low transaction volume.
  4. Divergence signals: Diverging between MFI and price movements can be a signal for changing trend direction or reversals. If for example, a security makes new highs but not MFI; it may mean waning buying pressure indicating that there could be an end to the current trend.

Also read: OTC derivatives

Limitations of the Money Flow Index

The MFI may send false indications. This occurs when there appears to be a strong trading opportunity, but the market moves against the forecast, resulting in a loss. For example, a discrepancy might not cause the price to reverse.

Additionally, the signal might not reveal something significant. For instance, not all price reversals will result in a difference, even though it occasionally may. As a result, traders ought to employ more than one indication when assessing and managing risk.

The difference between the Money Flow Index (MFI) and the Relative Strength Index (RSI)

While both the Money Flow Index (MFI) and the Relative Strength Index (RSI) are momentum indicators used to assess market trends, the key distinction lies in their methodology. The MFI includes both price and trading volume in its calculation, whereas the RSI relies solely on price movement. Many advocates of volume analysis view the MFI as a potential leading indicator, as it may signal trend reversals earlier than the RSI. However, neither is inherently superior; they each bring unique insights, often delivering signals at different times based on the elements they consider.

Conclusion

The Money Flow Index is a useful tool for traders and investors looking to understand market sentiment and potential trend changes. By analysing both price and volume data, MFI provides a complete picture of market dynamics. However, it is important to recognize that MFI, like any other technical indicator, has its constraints and should be used carefully alongside other tools and strategies.

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Frequently asked questions

What does money flow index tell you?
The Money Flow Index (MFI), a technical oscillator, provides traders with a comprehensive perspective of market conditions by analysing both price and volume data. This allows traders to spot moments where assets may be overbought or oversold. It also has the ability to identify divergences, which are indicators of possible price trend reversals.
Which money flow indicator is best?
Trading genius Marc Chaikin, who received coaching from the world's most successful institutional investors, created the Chaikin Money Flow indicator. Because it gauges institutional accumulation-distribution, Chaikin Money Flow is the best volume and classical volume indicator.

The Chaikin volume indicator should normally be above the zero line during a rise. On the other hand, the Chaikin volume indicator ought to be below the zero line during sell-offs.

What is considered a good MFI value?

An MFI between 30 and 70 is typically seen as neutral and healthy. Values above 70 may signal overbought conditions, while those below 30 suggest the asset could be oversold.

Which indicator is better: RSI or MFI?

Both are useful, but MFI adds volume analysis to price momentum, offering deeper insight. If you're looking for a more complete picture, MFI may provide better signals than RSI in volume-sensitive markets.

Does a higher MFI always mean better performance?

Not always. A higher MFI indicates stronger buying pressure, but it could also mean the asset is nearing overbought levels. It’s important to read it in context with trends and other indicators.

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