A value of 80 or more is generally considered overbought, a value of 20 or less oversold. In other words, the money flow index shows how much a stock was traded. Traders also watch for larger divergences using multiple waves in the price and MFI. For example, a stock peaks at $10, pulls back to $8, and then rallies to $12. If MFI makes a lower higher when the price reaches $12, the indicator is not confirming the new high. Unlike conventional oscillators such as the Relative Strength Index (RSI), the Money Flow Index incorporates both price and volume data, as opposed to just price.
Aeropostale (ARO) became overbought when the Money Flow Index moved above 90 in late September and late December 2009. Extremes in MFI suggested that these advances were unsustainable and a pullback was imminent. The first overbought reading led to a sizable decline, but the second did not. Notice that ARO peaked with the first overbought reading and formed lower highs into October.
Money Flow Index – MFI Definition and Uses
One indicator is not better than the other, they are simply incorporating different elements and will, therefore, provide signals at different times. The overbought and oversold levels are also used to signal possible trading opportunities. Traders watch for the MFI to move back above 10 to signal a long trade, and to drop below 90 to signal a short trade. The Money Flow Index (MFI) is a technical indicator that measures the buying or selling pressure of an asset through price and volume. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
After the December overbought reading, ARO moved above 23 and consolidated. There were two down gaps and a support break, but these did not hold. The Money Flow Index (MFI) is a momentum indicator that measures the flow of money into and out of a security over a specified period of time. It is related to the Relative Strength Index (RSI) but incorporates volume, whereas the RSI only considers price. The MFI is calculated by accumulating positive and negative Money Flow values (see Money Flow), then creating a Money Ratio.
Money flow index: a volume-weighted oscillator
Third, failure swings at 80 or 20 can also be used to identify potential price reversals. For this article, the divergences and failure swings are be combined to create one signal group and increase robustness. The Money Flow Index (MFI) is an oscillator that uses both price and volume to measure buying and selling pressure. Created by Gene Quong and Avrum Soudack, MFI is also known as volume-weighted RSI. Money flow is positive when the typical price rises (buying pressure) and negative when the typical price declines (selling pressure).
- The typical price for each day is the average of high price, the low price and the closing price.
- Conversely, a very low MFI reading that climbs above a reading of 20 while the underlying security continues to sell off is a price reversal signal to the upside.
- Some sort of reversal or upturn is needed to confirm that prices have indeed turned a corner.
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It is used to show the money flow (an approximation of the dollar value of a day’s trading) over several days. For example, a very high Money Flow Index that begins to fall below a reading of 80 while the underlying security continues to climb is a price reversal signal to the downside. Conversely, a very low MFI reading that climbs above a reading of 20 while the underlying security continues to sell off is a price reversal signal to the upside. One of the primary ways to use the Money Flow Index is when there is a divergence. A divergence is when the oscillator is moving in the opposite direction of price. This is a signal of a potential reversal in the prevailing price trend.
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- It is related to the Relative Strength Index (RSI) but incorporates volume, whereas the RSI only considers price.
- There were two down gaps and a support break, but these did not hold.
- By looking at the trading volume in these specific periods, you can better reason how both retail and institutional traders are operating in the market.
- As a volume-weighted version of RSI, the Money Flow Index (MFI) can be interpreted similarly to RSI.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change.
Money flow index vs RSI
The money flow index calculates the ratio of positive and negative money flow over a period of time. The formula for calculating the money flow index involves several steps. Most platforms like FOREX.com will calculate the MFI automatically, but it can be useful to understand how it’s done.
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As shown in the MFI chart, a reading above 80 means that Bitcoin (BTC) is oversold and a price reversal to the downside can be expected. However, if you go back a little, when BTC was in the 40k range, the MFI indicator had a reading of 20 which meant that BTC is undersold both in terms of price and volume. After that, it has only gone up and is now in an oversold position on the daily chart.
How does the Money Flow Index (MFI) indicator work?
Quong and Soudack identified three basic signals using the Money Flow Index. First, chartists can look for overbought or oversold levels to warn of unsustainable price extremes. Second, bullish and bearish divergence can be used to anticipate trend reversals.
The RSI formula is then applied to create a volume-weighted indicator. The table below shows a calculation example taken from an Excel spreadsheet. This is when the indicator does something that indicates a good trading opportunity is present, but then the price doesn’t move as expected resulting in a losing trade. The main difference is that MFI incorporates volume, while the RSI does not. Proponents of volume analysis believe it is a leading indicator. Therefore, they also believe that MFI will provide signals, and warn of possible reversals, in a more timely fashion than the RSI.