The Money Flow Index (MFI) is a momentum oscillator that incorporates both price and volume data to measure buying and selling pressure. Often called the volume-weighted RSI, the MFI provides more comprehensive signals than price-only indicators by confirming momentum with actual trading activity.
What is the Money Flow Index?
The MFI oscillates between 0 and 100, combining price movement with volume to identify overbought and oversold conditions. Unlike the standard RSI which only considers price changes, the MFI weighs these movements by volume, making it particularly useful for confirming the strength of price moves.
Key concept: When price rises on high volume, MFI rises faster than RSI would. When price rises on low volume, MFI rises slower. This volume weighting helps distinguish between strong and weak moves.
MFI Calculation
The Money Flow Index calculation involves several steps:
Step 1: Typical Price
First, calculate the typical price for each period:
- Typical Price = (High + Low + Close) / 3
Step 2: Raw Money Flow
Multiply typical price by volume:
- Raw Money Flow = Typical Price x Volume
Step 3: Positive and Negative Money Flow
- If today's typical price is higher than yesterday's, it is positive money flow
- If today's typical price is lower than yesterday's, it is negative money flow
Step 4: Money Flow Ratio and MFI
- Money Flow Ratio = 14-period Positive Money Flow / 14-period Negative Money Flow
- MFI = 100 - (100 / (1 + Money Flow Ratio))
Calculation Example
Stock XYZ has these values:
High: $52, Low: $48, Close: $51, Volume: 1,000,000
Typical Price = ($52 + $48 + $51) / 3 = $50.33
Raw Money Flow = $50.33 x 1,000,000 = $50,330,000
If yesterday's typical price was $49.50, this is positive money flow.
MFI Signal Levels
Traditional Overbought/Oversold
- Above 80: Overbought - potential selling pressure ahead
- Below 20: Oversold - potential buying pressure ahead
- Between 20-80: Neutral zone
Extreme Readings
- Above 90: Extremely overbought - strong reversal signal
- Below 10: Extremely oversold - strong reversal signal
MFI Trading Strategies
1. Overbought/Oversold Reversals
The classic MFI strategy:
- Buy when MFI drops below 20 and then rises back above it
- Sell when MFI rises above 80 and then drops back below it
- Wait for confirmation - do not act on the first touch of extreme levels
Reversal Trade Example
Stock ABC is in a downtrend. MFI drops to 15 (oversold).
Price stabilizes and MFI crosses back above 20 with increasing volume.
Enter long position with stop below recent low.
Target the 50 MFI level or previous resistance for profit taking.
2. MFI Divergence
Divergences between price and MFI often precede reversals:
- Bullish divergence: Price makes lower low, but MFI makes higher low
- Bearish divergence: Price makes higher high, but MFI makes lower high
3. Failure Swings
A powerful but less common signal:
- Bullish failure swing: MFI falls below 20, bounces, pulls back but stays above 20, then breaks above the bounce high
- Bearish failure swing: MFI rises above 80, drops, rallies but stays below 80, then breaks below the drop low
MFI vs RSI: Key Differences
- Volume component: MFI includes volume, RSI does not
- Signal confirmation: MFI signals are generally stronger because they are volume-confirmed
- False signals: MFI typically produces fewer false signals in trending markets
- Divergences: MFI divergences tend to be more reliable
Combining MFI with Other Indicators
MFI + Moving Averages
- Only take MFI buy signals when price is above the 50-day moving average
- Only take MFI sell signals when price is below the 50-day moving average
MFI + Support/Resistance
- MFI oversold at support = stronger buy signal
- MFI overbought at resistance = stronger sell signal
MFI + Price Patterns
- Bullish candlestick pattern + MFI oversold = high probability long entry
- Bearish candlestick pattern + MFI overbought = high probability short entry
Common MFI Mistakes to Avoid
- Trading against strong trends just because MFI is overbought or oversold
- Ignoring the overall market context
- Using MFI alone without confirmation from price action
- Not adjusting settings for different timeframes
MFI Settings
- 14 periods: Standard setting, good for swing trading
- 10 periods: More sensitive, better for short-term trading
- 20 periods: Smoother, better for position trading
Track Your MFI-Based Trades
Pro Trader Dashboard helps you analyze which MFI setups work best for your trading style.
Summary
The Money Flow Index is a powerful momentum oscillator that adds volume confirmation to traditional overbought/oversold analysis. By incorporating both price and volume, MFI provides more reliable signals than price-only indicators. Use MFI for identifying potential reversals, confirming trend strength, and spotting divergences. Always combine MFI signals with price action and other technical tools for the best results.
Learn more: RSI indicator and volume analysis.