The Money Flow Index shows the rate at which money is flowing into or out of a market instrument. It is similar to the Relative Strength Index, except that the MFI also takes volume into account.
The MFI is interpreted the following ways:
- A price trend reversal is likely if the price and MFI are moving in opposite directions
- An MFI of over 80 signals a potential market top
- An MFI of under 20 signals a potential market bottom
To calculate the MFI, the typical price (TP) is calculated for the interval first. This is the average of the high, low and closing prices.
TP = ( HIGH + LOW + CLOSE ) / 3
The money flow (MF) in the interval is the typical price multiplied by the volume.
MF = TP * VOLUME
If the current typical price is higher than the previous typical price, then the flow is considered to be positive (PMF). Otherwise, it is considered to be negative (NMF).
IF TP( J ) > TP( J – 1 ) THEN
PMF( J ) = TP( J ) AND NMF( J ) = 0
PMF( J ) = 0 and NMF( J ) = TP( J )
J is the current interval
The money ratio (MR) is then calculated for a period of time. It is the sum of the positive money flows for that period, divided by the sum of the negative money flows.
MR = SUM( PMF, N ) / SUM( NMF, N )
N is the number of periods
The money ratio is then normalised to a range from 0 to 100, giving the MFI.
MFI = 100 – ( 100 / ( 1 + MR ) )