What is the 'Money Flow Index - MFI'
The money flow index (MFI) is a momentum indicator that measures the inflow and outflow of money into a security over a specific period of time. The MFI uses a stock's price and volume to measure trading pressure. Because the MFI adds trading volume to the relative strength index (RSI), it's sometimes referred to as volume-weighted RSI.
BREAKING DOWN 'Money Flow Index - MFI'
The value of the MFI is always between 0 and 100, and calculating it requires several steps. The developers of the MFI, Gene Quong and Avrum Soudack, suggest using a 14-day period for calculations. Step one is to calculate the typical price. Second, the raw money flow is calculated. The third step is to calculate the money flow ratio using the positive and negative money flows for the previous 14 days. Finally, using the money flow ratio, the MFI is calculated. Formulas for each of these items are as follows:
Typical price = (high price + low price + closing price) / 3
Raw money flow = typical price x volume
Money flow ratio = (14-day Positive Money Flow) / (14-day Negative Money Flow)
(Positive money flow is calculated by summing up all of the money flow on the days in the period where the typical price is higher than the previous period typical price. This same logic applies for the negative money flow.)
MFI = 100 - 100 / (1 + money flow ratio)
Many traders watch for opportunities that arise when the MFI moves in the opposite direction as the price. This divergence can often be a leading indicator of a change in the current trend. An MFI of over 80 suggests the security is overbought, while a value lower than 20 suggest the security is oversold.
Money Flow Index Calculation Example
While a 14-day period is typically used in calculating the MFI, for simplicity's sake, below is a four-day example. Assume a stock's high, low and closing prices for four days are listed along with volume as:
Day one: high = $24.60, low = $24.20, closing = $24.28, volume = 18,000 shares
Day two: high = $24.48, low = $24.24, closing = $24.33, volume = 7,200 shares
Day three: high = $24.56, low = $23.43, closing = $24.44, volume = 12,000 shares
Day four: high = $25.16, low = $24.25, closing = $25.05, volume = 20,000 shares
Using the above formula, the typical prices are:
Day one = $24.36
Day two = $24.35
Day three = $24.14
Day four = $24.82
Raw money flow for each day is:
Day one = $24.36 x 18,000 = 438,487
Day two = $24.35 x 7,200 = 175,323
Day three = $24.56 x 12,000 = 289,736
Day four = $25.16 x 20,000 = 496,400
Money flows are:
Positive money flow = 438,487 + 496,400 = 934,887
Negative money flow = 175,323 + 289,736 = 465,059
Money flow ratio = 934,887 / 465,059 = 2.01
Money flow index = 100 - 100 / (1 + 2.01) = 100 - 33.22 = 66.78