5/29/2021 Money Flow Index - Overview, Formula, and Signals

Money Flow Index

A movement indicator that analyzes both time and price to measure the trading
pressure – buying or selling

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What is Money Flow Index?

Money Flow Index (MFI) is a movement indicator that analyzes both time and price to
measure the trading pressure – buying or selling. It is also called volume-weighted Relative
Strength Index (RSI), as it includes volume, unlike RSI, which only incorporates price.

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5/29/2021 Money Flow Index - Overview, Formula, and Signals

Positive money flow is indicated by an increase in typical price, signaling buying pressure,
whereas a decrease in typical price indicates a negative money flow, thus signaling a selling
pressure. These positive and negative money flows are accumulated to create a money flow
ratio or money ratio.

The money ratio is used to find out the MFI that oscillates between 0 and 100. As the MFI
incorporates volume, it can be used for the identification of price extremes and reversals
with diverse signals.

Summary

Money Flow Index (MFI) is an indicator that measures the selling and buying
pressure by analyzing price and volume data.

The MFI indicator swings between 0 and 100.

The overbought condition occurs when the MFI rises above 80. An MFI below
20 indicates an oversold condition.

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5/29/2021 Money Flow Index - Overview, Formula, and Signals

Formula for the Money Flow Index (MFI)

Money Flow Index (MFI) can be calculated using the following steps:

1. Compute the typical price for a period.

Typical Price = (Low + High + Close) / 3

If the typical price for today is higher than yesterday, it implies a positive money flow. If the
typical price is lower, it implies a negative money flow. The aggregate of positive money over
certain periods gives positive money flow, and the aggregate of negative money over certain
periods gives negative money flow.

2. Compute the raw money flow.

Raw Money Flow = Volume x Typical Price

3. Compute the money ratio.

Money Ratio = 14-period Positive Money Flow / 14-period Negative Money Flow

4. Compute the Money Flow Index (MFI).

Money Flow Index (MFI) = 100 – [100 / (1 + Money Ratio)]

Money Flow Index (MFI) Signals

MFI generates three main signals – overbought/oversold conditions, failure swings, and
divergences.

1. Overbought/Oversold condition

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5/29/2021 Money Flow Index - Overview, Formula, and Signals

A security will be considered overbought if the MFI shows a fast price rise to a high level.
Similarly, a security is considered oversold if the MFI indicates a rapid decline in the price to
a considerably low level. The oversold and overbought levels are helpful in the identification
of price extremes.

Generally, overbought conditions occur if the MFI is above 80, and below 20 MFI indicates
oversold conditions. The prices may continue to rise while the upward trend is strong, and
the MFI can increase beyond 80.

On the other hand, MFI can drop below 20 when the prices continue to fall in the presence
of a strong downward trend. If the MFI increases above 90, it is considered a truly
overbought condition, and a below 10 MFI is considered a truly oversold condition.

However, the MFI beyond 90 and less than 10 occur rarely and suggest that a price
movement is not sustainable. Many securities trade in the exchange market without
reaching the price extremes of the 90/10 level.

2. Divergences

Divergence signals occur if the indications from the price action and the MFI are the
opposite. The difference in the indications can be regarded as an upcoming reversal.
Specifically, there are two types of divergences:

Bullish Money Flow Index (MFI) divergence

It occurs when the price changes to a new low, whereas, the MFI indicates a higher low
showing a boost in money flow. It implies that the selling pressure is decreasing, and buyers
will be taking over the market. It presents an opportunity of buying the securities at low
prices.

Bearish Money Flow Index (MFI) divergence

It occurs when the price shifts to a new high while the MFI indicates a lower high. It signifies
the decrease in buying pressure and the time for sellers to take over the market. It is an
opportunity for sellers to make profits.

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5/29/2021 Money Flow Index - Overview, Formula, and Signals

3. Failure swings

Like divergences, failure swings can also result in a reversal in price. However, failure swings
do not depend on price and completely rely on the MFI. There are four steps in failure
swings in both types of failure swings – bullish and bearish.

Bullish Money Flow Index (MFI) failure swing

Step 1: MFI decreases below 20 (oversold)

Step 2: MFI recovers and rises above 20

Step 3: MFI decreases but stays above 20

Step 4: MFI shoots above the previous high

Bearish Money Flow Index (MFI) failure swing

Step 1: MFI increases above 80 (overbought)

Step 2: MFI drops below 80

Step 3: MFI slightly increases but stays below 80

Step 4: MFI drops below the previous low

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™
certification program, designed to help anyone become a world-class financial analyst. To
keep advancing your career, the additional CFI resources below will be useful:

Volume Weighted Adjusted Price (VWAP)

Average Selling Price (ASP)

Bullish and Bearish

Relative Strength Index (RSI)

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