The Money Flow Index indicator is a momentum indicator that measures the flow of money. This indicator is also known as MFI. It is related to the RSI (Relative Strength Index) but incorporates volume, whereas the Relative Strength Index only considers the price. The MFI is calculated by accumulating positive and negative Money Flow values, then creating a Money Ratio which is then normalized into the Money Flow Index (MFI) oscillator form.
What Actually Is Money Flow Index Indicator?
Money Flow Index (MFI) is an oscillator that uses both price and volume to measure buying and selling pressure. This is created by Gene Quong and Avrum Soudack. MFI is also known as volume-weighted RSI. The Money Flow Index starts with the typical price for each period. This is positive when the typical price rises with buying pressure and negative when the typical price declines with selling pressure. In the MFI, a ratio of positive and negative money flow is then combined into a Relative Strength Index formula to create an oscillator that moves between zero and 100. As a momentum oscillator tied to volume, the Money Flow Index (MFI) is best suited to identify reversals and price extremes with a variety of signals.
The Money Flow Index indicator is available in the STUDIES section in the Zerodha Kite terminal. You can attach the indicator to any daily, weekly, monthly or intraday charts. Check the image below to understand how we attached the indicator in HDFC Bank share price chart and what are the default parameters for MFI. The default parameters are 14 and the overbought zone is at 80 and the oversold zone is at 20. However, you can change the PERIOD and overbought and oversold zones as per your convenience.
In Money Flow Index indicator, overbought and oversold levels can be used to identify unsustainable price extremes. MFI above 80 is considered overbought and MFI below 20 is considered oversold. In this, the strong trends can present a problem for these classic overbought and oversold levels. MFI can become overbought (80) and prices can simply continue higher when the uptrend is strong. And MFI can become oversold (20) and prices can simply continue lower when the downtrend is strong. Quong and Soudack recommended expanding these extremes to further qualify signals. A move above 90 is truly overbought and a move below 10 is truly oversold. Though, moves above 90 and below 10 are rare occurrences that suggest a price move is unsustainable.
The Money Flow Index indicator is also a unique indicator that combines momentum and volume with an RSI formula. RSI momentum generally favors the bulls when the indicator is above 50 and the bears when below 50. Even though MFI is considered a volume-weighted RSI, using the centerline to determine a bullish or bearish bias does not work as well. MFI is better suited to identify potential reversals with overbought/oversold levels, bullish/bearish divergences, and bullish/bearish failure swings. As with all other technical indicators, MFI should not be used by itself.
Categories: Technical Indicators