Money Flow Index Explained with Trading Strategy & Examples
Throughout our site in both tutorial and screener, if we have given maximum emphasis on a parameter after price then it is volume. Other indicators give leads but it is volume which gives stamp of approval to signal. Because of this reason various volume based indicators emerged and some of the prominent ones are Chaikin Money Flow(CMF), On Balance Volume(OBV), ADL and Money Flow Index(MFI).
Money Flow Index was developed to gauge buying and selling pressure. It is yet again a momentum oscillator that takes with price and volume in consideration. It being a oscillator with values between 0 & 100, it is easy to interpret.Its way of calculation is similar to RSI with exception of volume included in MFI, therefore its signal and interpretation is also similar to RSI. It is also called Volume Weighted RSI. So what does it measure, it measure how much money is coming into the market (accumulation) and at what rate.
MFI is normally represented as a small chart below price chart as
Formula For Money Flow Index Indicator
Typical Price: (High + Low + Close) / 3
Money Flow: Typical Price x Volume
Positive Money Flow: The Money Flow on days where the Typical Price is greater than the previous day's Typical Price.
Negative Money Flow: The Money Flow on days where the Typical Price is less than the previous day's Typical Price.