MFI (Money Flow Index)

The Money Flow Index (MFI) is a momentum indicator that measures the inflow and outflow of money into an asset over a specific period of time. It combines both price and volume data to identify overbought or oversold conditions and potential trend reversals.

Formula

Typical Price = (High + Low + Close) / 3
Raw Money Flow = Typical Price × Volume
Money Flow Ratio = (14-period Positive Money Flow) / (14-period Negative Money Flow)
MFI = 100 - (100 / (1 + Money Flow Ratio))

How MFI Works

The MFI oscillates between 0 and 100, with readings above 80 considered overbought and below 20 considered oversold. Unlike the RSI, which only considers price, MFI incorporates volume, making it a volume-weighted version of RSI. This additional dimension can provide stronger signals and help confirm price movements.

Trading Strategies Using MFI

Strategy Examples

Trade reversals when MFI reaches extreme levels (above 80 or below 20)
Look for bullish/bearish divergences between price and MFI
Use MFI crossovers of the 50 level for trend confirmation
Combine with other indicators for stronger signals
Monitor failure swings for potential trend reversals

Support and Resistance Strategy

Use MFI levels as dynamic support/resistance zones
Look for price rejection at key MFI levels
Combine MFI with traditional support/resistance levels
Monitor volume confirmation at support/resistance zones
Use MFI divergence at key price levels for confirmation

Trend Identification

MFI above 50 indicates bullish trend
MFI below 50 indicates bearish trend
Higher highs in MFI confirm uptrend strength
Lower lows in MFI confirm downtrend strength
Use MFI slope changes for trend reversal signals

Advantages and Limitations

Advantages

Incorporates both price and volume data
Effective for identifying potential reversals
Helps confirm trend strength
Good for spotting divergences

Limitations

Can generate false signals in ranging markets
May lag behind rapid price movements
Requires significant volume data for accuracy
Should not be used in isolation

Best Practices When Using MFI

Use multiple timeframes to confirm MFI signals
Combine with other technical indicators for validation
Wait for clear overbought/oversold signals before trading
Monitor divergences between price and MFI
Use MFI with volume analysis for stronger confirmation
Consider market conditions when interpreting MFI values
Look for confluence between MFI and other momentum indicators
Backtest different MFI calculation periods
Document which MFI patterns work best for your trading style
Regularly review and optimize your MFI-based strategies