Money Flow Indicators

The Money Flow Index (MFI) is a momentum indicator that is similar to the Relative Strength Index (RSI) in both interpretation and calculation. However, MFI is a more rigid indicator in that it is volume-weighted, and is therefore a good measure of the strength of money flowing in and out of a security.

It compares "positive money flow" to "negative money flow" to create an indicator that can be compared to price in order to identify the strength or weakness of a trend. Like the RSI, the MFI is measured on a 0 - 100 scale and is often calculated using a 14 day period.

AThe "flow" of money is the product of price and volume and shows the demand for a security and a certain price. The money flow is not the same as the Money Flow Index but rather is a component of calculating it. So when calculating the money flow, we first need to find the average price for a period. Since we are often looking at a 14-day period, we will calculate the typical price for a day and use that to create a 14-day average.

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

Money Flow = (Typical Price) x (Volume)

The MFI compares the ratio of "positive" money flow and "negative" money flow. If typical price today is greater than yesterday, it is considered positive money. For a 14-day average, the sum of all positive money for those 14 days is the positive money flow. The MFI is based on the ratio of positive/negative money flow (Money Ratio).

Money Ratio = (Positive Money Flow / Negative Money Flow)

Money Flow Index = 100 - (100 / (1 + Money Ratio))

As with the RSI, the MFI can be used to determine if there is too much or too little volume associated with a security.

A stock is considered "overbought" if the MFI indicator reaches 80 and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and below suggests a stock is "oversold".

The fewer number of days used to calculate the MFI, the more volatile it will be.