Money Flow Index (MFI)

What Is a Money Flow Index (MFI)?

Developed by Avrum Soudack and Gene Quong, the Money Flow Index (MFI) is an indicator that measures buying and selling momentum of a financial asset using both volume and price action. 

A rise in usual price shows positive money flow, indicating purchasing pressure, while a fall in the price implies negative money flow, indicating selling pressure. A money flow ratio, also known as a money ratio, is computed by summing positive and negative money flows.

The money ratio is used to assess the MFI, which ranges from 0 to 100. It can be used to identify price extremes and reversals with a variety of signals as it uses both volume and price.

As shown in the MFI chart, a reading above 80 means that Bitcoin (BTC) is oversold and a price reversal to the downside can be expected. However, if you go back a little, when BTC was in the 40k range, the MFI indicator had a reading of 20 which meant that BTC is undersold both in terms of price and volume. After that, it has only gone up and is now in an oversold position on the daily chart. 

Why Is Money Flow Index (MFI) Used?

The Money Flow Index is one of the most useful tools when it comes to analyzing a divergence in the chart of an asset. When the MFI oscillator moves in the opposite direction of price, it is called a divergence which implies an indication that the current price trend is reversing. Experienced traders avoid opening their trades when an asset is in the overbought territory due to the price reversal dangers.

What Is the Best Setting for Money Flow Index (MFI)? 

Different traders rely on different settings, however, the most popular and recommended one is as follows:

• Overbought signal line: 80
• Overbought signal line: 20

Money Flow Index (MFI) Formula

Here’s how you can calculate the Money Flow Index (MFI):

Where:

Money Flow Ratio = 14 Period Negative Money Flow / 14 Period Positive Money Flow

Raw Money Flow =Typical Price x Volume

Typical Price = 3 High + Low + Close