Money Flow Index (MFI)
The Money Flow Index (MFI) is a technical indicator used to measure the strength of money flowing in and out of a security, commodity, or currency. It combines price and volume data to give an indication of whether there is heavy buying or selling pressure on the asset being studied. The MFI was developed by Gene Quong and Avrum Soudack in 1994 as an improvement over traditional oscillators such as relative strength index (RSI).
Calculation
Typical Price = (High + Low + Close)/3
Raw Money Flow = Typical Price x Volume
Positive Money Flow = Sum of all positive Raw Money Flows for n periods
Negative Money Flow = Sum of all negative Raw Money Flows for n periods
Money Ratio = Positive Money Flow/ Negative Money Flow
MFI= 100 – [100/(1+Money Ratio)]
Interpretation: When the value of the MFI is high, it means that there are strong buying pressures on the asset, while a low value indicates strong selling pressures. Generally speaking, values above 80 suggest that prices will continue rising while values below 20 signal upcoming declines. Values between 40-60 indicate ranging conditions that could lead to either direction depending on other indicators.
It should be noted however that False signals can occur if traders do not wait until the end of day before entering into trades; this because intraday price movements can cause abnormal readings withing certain ranges during trading hours which may not reflect overall market sentiment at close. To reduce false signals it’s recommended to use long-term time frames when analyzing with this indicator .