Money Flow Index
Type
Volume indicator
Short introduction
In addition to the actual prices, the Money Flow Index also includes turnover in the calculation. It represents a kind of "turnover momentum". The common abbreviation is "MFI".
Statement
The MFI is based on the idea of investing in a security when the value closes near the daily high. If the closing price is near the daily low, money is withdrawn from the security. The calculation is based on the so-called "typical price", which we have also introduced in the case of the Commodity Channel Index. If the current price is higher than the day before, then this is referred to as a positive cash flow ("money flow"). If the current price is lower, we speak of a negative money flow.
The money ratio is calculated on the basis of these two numbers. At the end, this ratio is standardised in order to obtain a clearer presentation that is easier to interpret. Due to the normalisation, the MFI always fluctuates around the 50 line with the maximum 100 and the minimum 0.
Formula/calculation
Xt = (H + L + C) ÷ 3
if Xt ≥ Xt-1, then +Yt = Xt × V and -Yt = 0.
if Xt ≤ Xt-1, then +Yt = 0 and -Yt = Xt × V.
MR = ((+Yt) + (+Yt-1) + (+Yt-2) + ... + (+Yt-n+1)) ÷ ((-Yt) + (-Yt-1) + (-Yt-2) + ... + (-Yt-n+1))
MFI = 100 - (100 ÷ (1 + MR))
where:
X = Typical price
+Y = Positive money flow
-Y = Negative Money Flow
MR = Money ratio
Interpretation
Based on its calculation, the MFI rises with rising prices and falls with falling prices. Since turnover also plays a role alongside prices, strong movements in the MFI always indicate particularly high turnover or very strong price changes compared with the previous day.
The standard signal is interpreted as crossing with the 50 line. A crossing up through this line may be used as a signal to buy, a crossing down through this line is a signal to sell. Alternatively, you can place a Moving Average over the MFI and interpret the intersections between MA and MFI as a signal, similar to the MACD.
In addition to this interpretation, many analysts also use divergences between the underlying and the MFI to generate signals. If the price continues to rise, but the MFI is already falling, an imminent end to the upward movement is to be expected. The same applies vice versa when prices are still falling and MFIs are already rising.
Default setting
- Period: 20 days