Calculate and Interpret the Money Flow Index

The money flow index (MFI) is an oscillating indicator used to determine the strength of a current price trend through the price and volume analysis of any particular security. The money flow index provides a line that moves between 0 and 100; the closer it moves to 100, the more strength in the price trend. The goal of the money flow indicator is to determine whether the trend will last. The difference between the money flow indicator and the relative strength index (RSI) is that the money flow index looks at both price and volume, while the RSI looks only at price.

Uses of the Money Flow Index

A trader may use the money flow index to:

Identify the top and bottom of a trend: When the MFI for any particular stock rises above 80, it is often considered to be overbought. A stock is often seen as oversold when the index drops below 20.

Confirm the direction of a trendline: Upward slopes are bullish, while downward slopes are bearish.

Identify and take advantage of price reversals: A divergence from the trendline.

The theory behind the money flow index is that if a good number of investors acquire the stock when they see an upward movement in its price, the trend is like to continue. If an upward price movement causes few investors to join, the trend is not likely to continue.

Calculate the Money Flow Index

The process for calculating the money flow index is as follows:

(1) Calculate the typical price of the security as
(High + Low + Close) /3

(2) Calculate money flow as
Typical Price x Volume

(3) Calculate the Money Ratio as
Positive Money Flow / Negative Money Flow

(4) Calculate the money flow index as
100 – (100 / (1 + Money Ratio))

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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