The Money Flow Index (MFI) ranges from 0 to 100 showing dollar volume (referred to as “money flow”) on up days as a percentage of total up and down days, in a given past N days.
The calculation is as follows. A “typical price” is formed from the average of high, low and close. If high/low figures are not available then Chart just uses the close,
high + low + close typical price = ------------------ 3
“Money flow” on a given day is typical price multiplied by volume. This is the money that flowed, ie. an approximation to the dollar volume traded.
money flow = typical price * volume
Across the N-day period two totals are formed. “Positive money flow” is the money flow on days where the typical price is higher the previous day’s typical price, and “negative money flow” when below. Days when typical price is unchanged are ignored. The MFI is then
positive money flow MFI = 100 * ----------------------------------------- positive money flow + negative money flow
Generally an MFI level of 80 is considered overbought, and 20 considered oversold. Those levels are shown as shown as dashed lines.
MFI is similar to RSI (see Relative Strength Index) in its construction and use. Both are looking at up days versus totalled up and down days, but the RSI scales by price change amounts where MFI scales on dollar volume (or an approximation to that).
It should be noted “money flow” refers to dollar volume, ie. the total value of shares traded. Sometimes finance commentators speak of money “flowing into” a stock, but that expression only means buyers are enthusiastic. Obviously there’s never any net money in or out, because for every buyer there’s a seller of the same amount.
For the purposes of the MFI, “money flow”, ie. dollar volume, on an up day is taken to represent the enthusiasm of buyers, and on a down day to represent the enthusiasm of sellers. An excessive proportion in one direction or the other is interpreted as an extreme, likely to result in a price reversal.
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