Money Flow Index
The Money Flow Index (MFI) is used to predict price reversals.
MFI is found using multiple calculations involving price, volume and accumulation/distribution data, and it oscillates between the values of 0 and 100. Readings below 20 typically signal that the security is oversold, and readings over 80 indicate the security is overbought.
MFI also warns against potential future price reversals through divergences in the following ways:
- If prices are rising, and volume is high on up days and low on down days, then MFI confirms an upward trend.
- If prices are decreasing, and the volume on down days is greater than the volume on up days, then MFI confirms a downtrend.
- If prices are rising, but the volume on up days is less than the volume on down days, it's an indication of a bearish divergence, which means that prices may soon start to move downward.
- When prices are decreasing, but the volume on down days is less than the volume on up days, it's a bullish divergence, which means that prices may start to move upward.
The Money Flow Index requires a series of calculations. First, the period's Typical Price is calculated.
Next, Money Flow (not the Money Flow Index) is calculated by multiplying the period's Typical Price by the volume.
If today's Typical Price is greater than yesterday's Typical Price, it is considered Positive Money Flow. If today's price is less, it is considered Negative Money Flow.
Positive Money Flow is the sum of the Positive Money over the specified number of periods. Negative Money Flow is the sum of the Negative Money over the specified number of periods.
The Money Ratio is then calculated by dividing the Positive Money Flow by the Negative Money Flow.
Finally, the Money Flow Index is calculated using the Money Ratio.
The Money Flow ranges from 0 to 100. Just like the RSI, a stock is considered overbought in the 70-80 range and oversold in the 20-30 range.
Specific securities represented in this manual are for illustration purposes only. Any information concerning a particular security should not be considered a recommendation or a solicitation of that security. Illustrations may not represent current market values.