Money Flow Index

Money Flow Index (MFI) – is the technical indicator showing intensity of investments into security. In many respects Money Flow Index is similar to the Relative Strenght Index, RSI. The only difference is that MFI also accounts for the volume (tick volume in Forex), whereas RSI does not. Also, in opinion of most part of analysts MFI is a more reliable indicator and can be a more universal figure for measuring strength of flows of money invested or deducted from a certain financial instrument.

Calculation formula for indicator:

Primarily Typical Priсe of given period is defined:

where:

HIGH — highest price of current bar;
LOW- lowest price of current bar;
CLOSE - close price of current bar.

Then Money Flow is calculated:

where:

VOLUME - volume of current bar;

If Typical Price (TP) is above yesterday's value, money flow is considered positive. If today's TP is below yesterday's TP, the money flow is negative. Then the sum of negative and positive money flow is found for a certain period and finally through dividing Money Ratio, TP is defined:

Finally, index of money flow is equal:

Application of Money Flow Index

MFI conveys two main types of signals:

Overbought/oversold zone

The indicator value is within the range 0 – 100. Overbought zone: 80-100, oversold zone: 0-20. When the indicator is in overbought zone, it says that soon a potential top point will be formed. When the indicator finds itself in oversold zone – a potential lacuna is formed.

Pic. 1 - Overbought/oversold zones of MFI oscillator

 Divergence/convergence

Bullish divergence and bearish convergence are the most significant alerts for indicator. Bullish divergence occurs when a higher price maximum is not confirmed by a higher maximum by MF1. Bearish convergence occurs when a lower price minimum is not confirmed by lower minimum by MF1. Should the indicator confirm a new peak or hollow, it tells about strength of trend and its continuation.

Pic.2 Divergence/ convergence of MFI oscillator

Conclusion

Main advantage of MFI against other technical tools is its fixidity. To decrease false signals, it is better to combine application of oscillator with other trend indicators. Index disadvantages include tick volume applied in the Forex market. Real volume would mush more fit, but despite this fact, MFI still performs as excellent estimation tool for movement of money flow.