What is the Money Flow Index (MFI)?
The Money Flow Index (MFI) is a technical analysis indicator used to identify overbought or oversold conditions in a trading asset. Developed by Bill Williams, it's an improvement on the Relative Strength Index (RSI) by incorporating volume into the calculation. This addition aims to provide a more accurate assessment of price momentum, as volume confirms the strength of a trend. It's a momentum oscillator, meaning it fluctuates between 0 and 100.
How it Works
MFI calculates 'Positive Money Flow' and 'Negative Money Flow' using typical price (high + low / 2) multiplied by volume. Positive flow occurs when the typical price rises, and negative flow when it falls. These flows are then averaged over a specified period (usually 14 periods). The MFI is calculated from these averages. Higher values suggest strong buying pressure, while lower values indicate strong selling pressure.
Trading Signals
Generally, an MFI reading above 80 suggests an overbought condition, potentially signaling a price reversal downwards. Conversely, an MFI below 20 indicates an oversold condition, hinting at a possible price bounce. Divergences between the MFI and price action are also significant. Bullish divergence (price makes lower lows, MFI makes higher lows) suggests a potential uptrend, while bearish divergence (price makes higher highs, MFI makes lower highs) suggests a potential downtrend.
Basic Settings
The default period for MFI is 14, but traders often adjust this based on their trading style and the asset being analyzed. Shorter periods (e.g., 10) are more sensitive to price changes, while longer periods (e.g., 20) provide smoother signals. TradingView allows easy customization of this period. Experimentation is key to finding the optimal setting for your strategy. This is for educational purposes only, not financial advice.