The Money Flow Index (MFI) is often called the volume-weighted RSI because it combines price and volume to measure buying and selling pressure. This makes it more comprehensive than RSI alone. In this guide, we will explore how MFI works and how to use it effectively in your trading.
What is the Money Flow Index?
The Money Flow Index is a momentum oscillator that uses both price and volume to identify overbought or oversold conditions. It ranges from 0 to 100. Readings above 80 suggest overbought conditions, while readings below 20 suggest oversold conditions.
MFI vs RSI: While RSI only considers price changes, MFI incorporates volume. This makes MFI potentially more reliable because it confirms that money is actually flowing into or out of a stock.
How MFI is Calculated
MFI calculation involves several steps:
- Typical Price: (High + Low + Close) / 3
- Raw Money Flow: Typical Price x Volume
- Positive Money Flow: Sum of raw money flow on days when typical price increased
- Negative Money Flow: Sum of raw money flow on days when typical price decreased
- Money Flow Ratio: Positive Money Flow / Negative Money Flow
- MFI: 100 - (100 / (1 + Money Flow Ratio))
Simplified Interpretation
When MFI is high (above 80), a lot of money has been flowing into the stock recently. This suggests aggressive buying that may be unsustainable. When MFI is low (below 20), money has been flowing out, suggesting selling may be overdone.
Interpreting MFI Readings
Overbought Conditions (MFI above 80)
When MFI rises above 80, the stock may be overbought. This does not mean you should immediately sell or short. Strong stocks can remain overbought for extended periods during uptrends. Instead, use overbought readings as a warning to be cautious with new long positions.
Oversold Conditions (MFI below 20)
When MFI falls below 20, the stock may be oversold. Again, this is not an automatic buy signal. Weak stocks can stay oversold during downtrends. Use oversold readings to watch for potential buying opportunities, especially if other factors align.
The 50 Level
The 50 level acts as a centerline. MFI above 50 suggests buying pressure is stronger than selling pressure. MFI below 50 suggests selling pressure dominates. Crossovers of the 50 level can signal shifts in momentum.
MFI Divergences
Divergences between MFI and price are powerful signals that often precede reversals.
Bullish Divergence
Price makes a lower low, but MFI makes a higher low. This suggests that despite lower prices, less selling pressure exists compared to the previous low. Money is not flowing out as aggressively, hinting at a potential bottom.
Bearish Divergence
Price makes a higher high, but MFI makes a lower high. This suggests that despite higher prices, buying pressure is weakening. Money is not flowing in as aggressively, hinting at a potential top.
MFI Trading Strategies
Strategy 1: Overbought/Oversold Reversal
Trade reversals from extreme MFI levels.
- Wait for MFI to reach extreme levels (above 80 or below 20)
- Look for MFI to reverse direction while still in the extreme zone
- Enter when MFI crosses back through the 80 or 20 level
- Confirm with price action (reversal candle patterns)
Strategy 2: MFI Divergence Trading
Trade divergences between MFI and price.
- Identify bullish divergence at support levels for long entries
- Identify bearish divergence at resistance levels for short entries
- Wait for price confirmation before entering
- Set stops beyond the recent swing point
Strategy 3: MFI Trend Confirmation
Use MFI to confirm trend direction and strength.
- In uptrends, MFI should consistently stay above 50 and approach overbought on rallies
- In downtrends, MFI should consistently stay below 50 and approach oversold on selloffs
- When MFI behavior changes, it may signal trend weakening
Combining MFI with Other Indicators
MFI and RSI
Using MFI and RSI together can provide stronger signals. When both indicators agree on overbought or oversold conditions, the signal is more reliable. When they diverge, it may indicate a less clear picture.
MFI and Moving Averages
Combine MFI with moving average crossovers for trend-following trades. An oversold MFI combined with a bullish moving average crossover can be a strong buy signal.
MFI and Support/Resistance
MFI extremes at key support or resistance levels are particularly significant. Oversold MFI at major support suggests a high-probability bounce. Overbought MFI at major resistance suggests a high-probability rejection.
MFI Settings and Timeframes
The default MFI period is 14, which works well for most situations. However, you can adjust it:
- Shorter period (10): More sensitive, more signals, more false signals
- Longer period (20): Less sensitive, fewer signals, more reliable signals
MFI works on all timeframes. Longer timeframes (daily, weekly) provide more reliable signals. Shorter timeframes (15-min, hourly) are useful for day trading but require additional confirmation.
Common MFI Mistakes to Avoid
- Trading overbought/oversold blindly: These are warnings, not automatic signals
- Ignoring the trend: MFI works better with the trend than against it
- Using MFI alone: Always combine with other analysis tools
- Expecting instant reversals: MFI extremes can persist in strong trends
Monitor MFI Across Your Portfolio
Pro Trader Dashboard helps you track money flow indicators across all your positions. Get alerts when MFI reaches extreme levels and identify potential reversals early.
Summary
The Money Flow Index is a valuable tool that goes beyond simple price analysis by incorporating volume. It helps identify overbought and oversold conditions with more context than RSI alone. Focus on MFI divergences for the highest-probability signals, and always use MFI in conjunction with other technical analysis tools. Remember that extreme readings are warnings to be cautious, not automatic trading signals.
Learn more about volume indicators in our guides on Accumulation/Distribution and Chaikin Oscillator.