Money Flow Index (MFI)
🔍 What is the Money Flow Index (MFI)?
The Money Flow Index (MFI) is a momentum indicator that uses both price and volume to measure buying and selling pressure. Often referred to as a “volume-weighted RSI,” the MFI oscillates between 0 and 100 and is used to spot overbought or oversold conditions in an asset, as well as potential trend reversals and divergences.
Unlike the Relative Strength Index (RSI), which only considers price, the MFI incorporates volume, making it a more comprehensive tool for assessing market strength.
⚙️ How the MFI Works
The MFI is calculated through a series of steps:
Typical Price (TP) = (High + Low + Close) / 3
Raw Money Flow = Typical Price × Volume
Positive and Negative Money Flow:
If TP > TP of previous day → Positive Money Flow
If TP < TP of previous day → Negative Money Flow
Money Flow Ratio = Sum of Positive Money Flow over N periods / Sum of Negative Money Flow over N periods
MFI = 100 - [100 / (1 + Money Flow Ratio)]
The default period is usually 14.
📖 How to Read the MFI
The MFI provides useful signals based on levels and divergences:
Overbought zone: MFI > 80 → The asset may be overvalued and a pullback is possible.
Oversold zone: MFI < 20 → The asset may be undervalued and a bounce could occur.
Divergence: When the price makes a new high/low but MFI doesn't, it may indicate weakening momentum and a reversal could be near.
Centerline (50): Indicates balance between buying and selling pressure.
⚙️ Best Settings for MFI
The default period of 14 is the most widely used, but you can adjust it depending on your trading style:
Short-term traders: 7–10 periods for more sensitive signals.
Long-term traders: 20–21 periods to smooth out market noise.
Tips:
Combine with trend indicators like Moving Averages to reduce false signals.
Use with support/resistance zones for higher accuracy.
🧠 How to Use MFI in a Strategy
Here are a few ways traders integrate the MFI into their strategies:
1. Overbought/Oversold Reversals
Go short when MFI > 80 and price shows weakness.
Go long when MFI < 20 and price forms a bullish structure.
2. Divergence Strategy
Look for bearish divergence: price makes higher highs, MFI makes lower highs → short opportunity.
Look for bullish divergence: price makes lower lows, MFI makes higher lows → long opportunity.
3. MFI + RSI/MA
Use MFI to confirm RSI signals or trend-based strategies.
Example: Buy when price is above 200 MA and MFI crosses above 50 from below.
⚠️ Common Mistakes to Avoid
Using MFI in isolation: Always combine it with other technical tools or price action.
Trusting every overbought/oversold signal: An asset can remain in these zones during strong trends.
Ignoring volume context: MFI is volume-based—during low-volume periods, it may be less reliable.
Poor time frame matching: Adjust MFI settings and interpretation based on your chart time frame.
🧠 Final Thoughts
The Money Flow Index is a powerful indicator for identifying market strength by combining price and volume. While similar to the RSI, it gives traders an extra layer of analysis thanks to its volume input. Used correctly, MFI can enhance your ability to detect potential trend reversals, confirm setups, and manage risk more effectively.
However, as with any indicator, context matters. Don’t rely solely on MFI—combine it with other technical tools, understand market conditions, and always apply sound risk management.
In the hands of a disciplined trader, the MFI can be an insightful ally.
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