What is the money flow index?


Understvà Price and Volume, và how these can affect market, is important in trading

In the past few weeks, we have sầu focused on a number of technical indicators (our Review of how the Parabolic SAR & the directional movement index works).

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In these articles, you have learned about how you can use these technical indicators successfully in the market. This time, we will look at another indicator that has become relatively popular.

In this article. We will look at the Money Flow Index (MFI) & how you can apply it successfully in the financial market.

What is money flow index indicator?

Money flow index was created by Gene Quong and Avrum Soudak. You will find the indicator in all trading platforms like the MT4 & our PPro8.

The MFI is a leading indicator that uses price và volume khổng lồ show whether the price is overbought or oversold. The index is usually positive when the price is rising and negative when the price is falling.

The best way to think of the MFI is khổng lồ consider the RSI, which we covered before. Basically, Gene & Avrum understood the importance of volume and how it affects the markets. They therefore added volume to lớn the calculation of the MFI.

How lớn Calculate: MFI formula

The MFI is calculated using a very simple formula. As we have sầu written before, you don’t need to know how these indicators are calculated.

While we have been in the trading business for many years và use these indicators often, we don’t know how most of them are calculated.

The MFI is calculated as follows:

You calculate the Typical Price (TP). You do this by adding the high, low, & cđại bại prices và then dividing the total by three.After finding the typical price, you calculate the Raw Money Flow. You vị this by multiplying the Typical Price with the volume.Calculate the Money Flow Ratio. You vì chưng this by dividing the period (often 14) positive sầu money flow by the period negative money flow.

Finally, the MFI is calculated by using the following formula.

Money Flow Index = 100 – 100 / (1 + Money Flow ratio)

Money Flow Index vs RSI

The MFI is usually interpreted in a similar way to lớn the RSI. The big difference between the two is that the MFI incorporates volume. Because of this, the MFI tends to lớn act a bit differently with the RSI because volume leads prices.

For starters, the Relative Strength Index (RSI) is a technical indicator that is classified as an oscillator. It basically measures the speed of change of a financial asset and helps khổng lồ identify overbought & oversold levels.

The RSI is calculated using the formula below.

RSI = 100 – 100/ 1 + RS

where the RS refers to the relative sầu strength.

When applied in a chart, the RSI và MFI usually look the same, as shown in the chart below. The purple indicator is the RSI while the green one is the MFI. As you can see, these indicators always move sầu in the same direction.

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A key difference between the RSI và the MFI is the default locations. In the RSI, the mặc định oversold level is 30 while the overbought is at 70. In the MFI, the two defaults are at đôi mươi và 80, respectively.

However, you can always change these figures in the settings.

How khổng lồ Use the money flow index

A good way lớn use the money flow index is to identify the overbought và oversold levels. When the MFI is above sầu 80, the price is said to lớn be overbought. It is said lớn be oversold when it is below 20.

However, as we mentioned when talking about the RSI, it is not mandatory that a reversal will happen the overbought và oversold levels are reached.

The price may continue to lớn move higher when it reaches the overbought level of 80. It may also continue lớn move lower when it moves lớn below đôi mươi. This happens when there is a very strong trkết thúc.

The chart below shows the MFI in action on the Apple stoông xã.


MFI on Apple Stock

Using the MFI to lớn find divergence

Divergences refer khổng lồ points where an asset’s price is rising while the indicator is falling and vice versa. Identifying a divergent period early enough can help you see when a reversal is about to lớn happen.

First, you need to look at an asset’s price visually and see the initial trover. Second, you should look at the performance of the MFI & join the key levels.

In this case, if the price is rising while the MFI is moving lower, it could be a sign that a bearish trkết thúc is about lớn start. A good example of this is in the Microsoft nói qua price below.


Divergence found in Microsoft Stochồng with MFI. Chart from Tradingview

As shown in orange, the MSFT stoông xã price is generally in an upward trkết thúc. At the same time, joining the upper sides of the MFI shows that it is moving lower. Ultimately, the shares broke out lower.

This is a good example of how this divergence works. However, a key issue is that divergences are rare occurrences in the market.

In addition khổng lồ identifying overbought và oversold levels, another key method of using the MFI is khổng lồ follow the trend. In this, you should buy the asphối when the MFI is rising và vice versa.

Strategies for your Day Trading

As you can see, while the MFI is a good indicator, it can also show you the wrong signals. This simply means that it can decline when the price is rising. This happens when there are divergencies.

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A good way to avoid these situations is to combine a number of technical indicators và other analysis tools such as the RSI and Fibonacci Retracement.