What is the Money Flow Index
The Money Flow Index MFI is a momentum indicator which is used to measure the amount of money flowing into and out of a security. The indicator is similar to the relative strength index formula, but instead of measuring a security’s price action relative to itself, it measures the volume.
Money Flow Index Formula
The MFI is comprised of two components. The first being the typical price and the last the volume. The typical formula is calucated as:
Typical Price = (High + Low + Close) / 3
The Money Flow Index is calcuated by multiplying the Typical price by the volume:
MFI = Typical Price * Volume
How to Trade with the Money Flow Index
The money flow index is again very similar to the RSI, so traders can look for commonalities between the two indicators. The RSI will move between 100 and 0. When the MFI is above 80 a potential market top is in play, while a reading below 20 indicates a market bottom. Another technique is if the price action and the MFI are both in unison to trade in the direction of that trend. However, if the price is rising while the Money Flow Index is falling, odds are this divergence will cause some sort of counter move in the security.
Money Flow Index Charting Example
Below is a charting example of the MFI. Notice how the trend remained intact as the MFI and price moved together, but once the MFI begin to show divergence, the price soon followed.