The Money Flow Index indicator is a momentum indicator that measures the flow of money. We can also call the indicator as MFI. It is related to the RSI (Relative Strength Index) but incorporates volume, whereas the Relative Strength Index only considers the price.
Definition of Money Flow Index Indicator
Money Flow Index (MFI) is an oscillator that uses both price and volume to measure buying and selling pressure. Gene Quong and Avrum Soudack created the tool. You can also refer to the indicator as to the volume-weighted RSI. I will describe the reason for its relation to RSI later in this article. The MFI usage both price and volume to measure buying/selling pressure on security.
Money Flow Index Indicator FAQ
First, calculate the raw money flow: typical price x volume.
Then, the money flow ratio: (14-period positive money flow) / (14-period negative money flow)
Lastly, calculate the MFI: 100 – 100 / (1 + money flow ratio)
The indicator is usually calculated using 14 periods of data. An MFI reading above 80 is overbought and a reading below 20 is considered oversold. These levels may change depending on the market conditions. Level lines must cut across the highest peaks and the lowest troughs.
The smart money index (SMI)/ smart money flow index is a technical tool, demonstrates investors’ sentiment. The index was invented and popularized by the popular money manager Don Hays. Professional, experienced investors start trading closer to the end of the day having the opportunity to evaluate the market performance.
The Money Flow Index or MFI is an oscillator that uses both price and volume to measure buying or selling pressure. Gene Quong and Avrum Soudack created this oscillator. It is also referred to as volume-weighted RSI. The technical tool starts with the typical price for each period.
How to Compute the Money Flow Index Indicator?
Here, is the step-by-step calculation of Money Flow Index Indicator
Just like some other indicators, the MFI depends on a calculation of the typical price. The calculation is as follows:
Typical price = (High price + low price + close price) / 3
Then we need to calculate the raw money flow (or simply money flow). It is a function of both volume and the typical price.
Money Flow = Volume x typical price
The following step involves the ratio between the positive and negative money flow. This calculation is as follows:
Money Flow Ratio = (N-Day Positive Money Flow) / (N-Day Negative Money Flow)
“N” is equal to the number of periods the indicator is set to. If kept to the default settings, N is 14.
Here, one thing is important that you can calculate Positive money flow by taking the sum of all the money flows on all days. There, the typical price of one day is above the previous day. In the same way, negative money flow is calculated taking the sum of all money flows on the days. There the typical price of one day is below the prior day.
With those three calculations, you can find the money flow index according to the following formula:
Money Flow Index = 100 – 100 / (1+ money flow ratio)
As I have mentioned above, this value will always come to a value between 0 and 100.
How to Use the Money Flow Index Indicator on Charting Platforms?
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.
However, check the image below in Zerodha Kite to understand how we attached the indicator in the 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.
Now, we will see the same indicator on the Upstox Pro terminal.
Here, you can apply the indicator like the same way you apply it to Zerodha kite.
Top Trading Tactics of Money Flow Index indicator
- In the Money Flow Index indicator, you can use overbought and oversold levels to identify unsustainable price extremes.
- MFI above 80 is 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.
Key Points on MFI Indicator
- The Money Flow Index starts with the typical price for each period.
- So, 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.
However, 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 a volume-weighted RSI, using the centerline to determine a bullish or bearish bias does not work as well. MFI identifies 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.