Money Flow Index (MFI)
Candlefocus EditorMFI works by measuring the inflow and outflow of money from security transactions over a given period. Volume is calculated by taking the difference between the total of all up days (where the close is higher than the open) and the total of all down days (where the close is lower than the open). This cumulative volume is then combined with the stock price for a given period to provide the money flow index. A high MFI reading indicates the presence of buying pressure, and when the MFI value is high, the price is usually rising. Conversely, a low MFI reading indicates the presence of selling pressure, and when the MFI value is low, the price is usually falling.
When the Money Flow Index value reaches above 80, it is considered overbought, while a reading under 20 is considered oversold. Additionally, many investors make use of a slightly more conservative threshold of 90 and 10 respectively. This allows traders to identify when a price is becoming increasingly more overvalued or less undervalued compared to historical levels.
The Money Flow Index can be used to spot divergences in price and MFI, which indicate possible reversal points. For example, if the price is flat or falling while the MFI is increasing, this may be an indicator that the price will soon reverse direction and start rising.
Overall, the Money Flow Index is a valuable technical indicator for investors, as it couples price information with volume data and provides insight into trader sentiment. By studying the signals generated by MFI, investors can make better informed decisions when trading in the financial markets.