Money Flow Index
The Money Flow Index, developed by Colin Twiggs, is one of the most useful and advanced momentum indicators that measure the strength of money flowing in and out of a security. It is a volume-weighted version of the Relative Strength Index or RSI.
The MFI is a banded oscillator that ranges from 0 and 100 to signal overbought and oversold. When the MFI reaches 80 and above, the security is considered as overbought. When the MFI falls 20 and below, the security is considered as oversold. A 14-day period is set as a default value.
Divergences between MFI and prices confirm trend reversals. If price makes a new low but the MFI is making higher lows, then it may indicate an uptrend. If price makes a new high but the MFI is making lower highs, then it may indicate a price reversal and a possible downtrend.
- Typical Price = (High + Low + Close) / 3
- Raw Money Flow = Typical Price * Volume
- Positive Money Flow = Sum of Raw Money Flow, where Typical Price > Typical Price previous over a certain period
- Negative Money Flow = Sum of Raw Money Flow, where Typical Price < Typical Price previous over a certain period
- Money Ratio = Positive Money Flow / Negative Money Flow
- Money Flow Index = 100 – ( 100 / 1 + Money Ratio )