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Money Flow Index (MFI)

Overview

While OBV looks solely at the flow of up- and down- volumes in and out of a security, Money Flow Index (MFI) also takes into account the actual price change and hence measures the strength of money flowing into and out of the security.

MFI works on the concept that a price change based on a small volume traded is not as significant as the same price change but based on a much bigger volume. Thus, it is conceptually similar to RSI as it is a momentum indicator that measures a security's inherent strength or weakness.


How it is calculated

MFI divides the money flow into a security into positive money flow and negative money flow. If typical price today is greater than yesterday, it is considered positive money.

During a period that the price of the security goes up, the multiplication of the volume and the price gives the positive money flow whereas a drop in price leads to negative money flow. MFI compares the ratio of positive money flow and negative money flow. For a 14-day average, the sum of all positive money for those 14 days is the positive money flow.

MFI gives a good indication on the buying and selling pressure on the security.


How to interpret

Overbought and Oversold

As any other oscillator, MFI does not grow indefinitely but oscillates between two boundaries namely 0 and 100. Generally, MFI that falls below 80 indicates overbought (bearish signal). Conversely, MFI that rises above 20 indicates oversold (bullish signal).


Divergence

Divergence between prices and MFI suggests that prices will be reversing. If prices are rising and MFI is decreasing (negative divergence), look for a turn downward in process. This is because a declining MFI suggests that there is greater volume associated with money flowing out from the stock than money flowing into the stock.

If prices are declining and MFI is increasing (positive divergence), expect prices to turn and move higher. Divergences that occur after an overbought or oversold reading usually provide more reliable signals.


Example

The MFI of Pearl Energy displayed overbought on 10 June and 18 July 2005. Afterwards, short-term price weaknesses were observed. On 8 September 2005, when price declined, MFI increases, thus indicating bullish divergence. There was greater volume associated with money flowing into the stock than money flowing out from the stock. Notice that prices were trending up soon afterwards.

Rules available in ChartNexus

MFI Touched And Rebounded/Retreated From Limit
  • MFI rebounding from lower limit to XX
  • MFI retreating from upper limit to XX
Parameters available:
  • Period - period of MFI
  • Lower Limit - lower limit of MFI
  • Upper Limit - upper limit of MFI
  • Limit Margin - if value sets to '''1' means RSI touched and rebounded/retreated from limit +/- 1
  • x - the amount that MFI rebounded/retreated from limit
  • x Margin - if value sets to '''3' means MFI rebounded/retreated within x +/- 3
  • t - the maximum number of days for the rebound/retreat to happen
MFI Crossing Limit
  • MFI at XX is in oversold region
  • MFI at XX is in overbought region
Parameters available:
  • Period - period of MFI
  • Lower Limit - lower limit of MFI
  • Upper Limit - upper limit of MFI
MFI Limit Exceeded
  • MFI at XX is in oversold region
  • MFI at XX is in overbought region
Parameters available:
  • Period - period of MFI
  • Lower Limit - lower limit of MFI
  • Upper Limit - upper limit of MFI
MFI Rebounding/Retreating In Oversold/Overbought Region
  • MFI rebounds from low in oversold region
  • MFI retreats from high in overbought region
Parameters available:
  • Period - period of MFI
  • Lower Limit - lower limit of MFI
  • Upper Limit - upper limit of MFI
  • x - the amount that MFI rebounded/retreated from limit
  • t - the maximum number of days for the rebound/retreat to happen
MFI Rebounded/Retreated In Oversold/Overbought Region And Touching/Crossing Limit
  • MFI crosses back lower limit from oversold region
  • MFI crosses back upper limit from overbought region
Parameters available:
  • Period - period of MFI
  • Lower Limit - lower limit of MFI
  • Upper Limit - upper limit of MFI
  • x - the amount that MFI rebounded/retreated from limit
  • x Margin - if value sets to '''3' means MFI rebounded/retreated within x +/- 3
  • t - the maximum number of days for the rebound/retreat to happen
MFI In Specified Range
  • MFI at XX is in range (min, max)
Parameters available:
  • Period - period of MFI
  • Min - minimum value of the range
  • Max - maximum value of the range
MFI Crossed 50% level
  • MFI crossed up 50% level
  • MFI crossed down 50% level
Parameters available:
  • Period - period of MFI
  • Cross Value - the level MFI must cross
MFI Failure Swing
  • MFI bottom failure swing
  • MFI top failure swing
Parameters available:
  • Period - period of MFI
  • Lower Limit - lower limit of MFI
  • Upper Limit - upper limit of MFI
  • x1 - the minimun amount below/above the recent peak/trough
  • x2 - the minimum amount MFI has moved above/below the recent peak/trough
MFI Divergence With Price
  • MFI is increasing with price still moving down
  • MFI is decreasing with price still moving up
Parameters available:
  • Max Divergence Days - the maximum number of days during which the divergence occurs
  • Min Divergence Days - the minimum number of days during which the divergence occurs
  • Min Overlap Length - the minimum number of overlapping days during which price and MFI diverge
  • Price Slope - the minimum slope of the moving average of the price
  • MFI Slope - the minimum slope of the moving average of MFI
  • Price MA Period - the number of days used for the period of the moving average of the price
  • MFI MA Period - the number of days used for the period of the moving average of the MFI
  • MFI On Right - if value set to '''YES''', only divergences with MFI slope on the right side of price slope are triggered
MFI Convergence With Price
  • MFI is increasing with price moving up
  • MFI is decreasing with price moving down
Parameters available:
  • Max Convergence Days - the maximum number of days during which the convergence occurs
  • Min Convergence Days - the minimum number of days during which the convergence occurs
  • Min Overlap Length - the minimum number of overlapping days during which price and MFI diverge
  • Price Slope - the minimum slope of the moving average of the price
  • MFI Slope - the minimum slope of the moving average of MFI
  • Price MA Period - the number of days used for the period of the moving average of the price
  • MFI MA Period - the number of days used for the period of the moving average of the MFI
  • MFI On Right - if value set to '''YES''', only convergences with MFI slope on the right side of price slope are triggered
MFI Trend
  • MFI is trending upwards
  • MFI is trending downwards
Parameters available:
  • t - the number of days that MFI has been trending
  • Slope - the slope of the MFI when it is trending

References :

  • Pring, M. J., Technical Analysis Explained: The Successful Investor's Guide to Spotting Investment Trends and Turning Points, 3rd Edition, 1991
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