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The Money Flow Index (or MFI) shows the balance between money flowing into and out of a stock, and is hence a kind of momentum indicator. Any divergence between the MFI and price is important - specifically if the price goes higher and the MFI doesn't follow, a reversal may be about to occur (vice versa for falling prices). Market tops statistically happen with a money flow index above 80, bottoms when the money flow index is below 20. Day trading methods utilising this indicator are infrequent because of the complexity of the calculation. To calculate the MFI, start by calculating the average of the high, low and close (the 'typical price'). Next, multiply the typical price by the volume (a typical price greater than yesterday's is 'Positive Money' otherwise it is 'Negative Money'). Then, over whatever period you are analysing, 'Positive Money Flow' is the sum of the Positive Money over the period, while 'Negative Money Flow' is the sum of the Negative Money over period. Finally, divide the Positive Money Flow by the Negative Money Flow. |
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