How to use money flow index in forex

Money Flow Index Indicator (MFI), How To Use.

Money Flow Index.

The Money Flow Index is a momentum indicator that was developed by Colin Twiggs and is an enhancement of Marc Chaikin’s Money Flow Index.

In fact, the Money Flow Index is a volume-weighted version of the Relative Strength Index , but instead of measuring a security's price action relative to itself, it measures the volume.

The MFI was designed to quantify the amount of money flowing into or out of a stock, commodity or share. In addition, MFI is a valuable tool for detecting trend weaknesses and pattern reversals.

The design of the MFI was based on research findings demonstrating that buying opportunities were normally preceded by rising volume levels together with increases in the number of closes in the top half of the daily range. Likewise, selling opportunities were preceded by rising volume levels together with increases in the number of closes in the lower half of the daily range.

The Money Flow Index is strongly correlated with the Relative Strength Index in that both operate within a range between 0 and 100. The MFI registers an overbought condition or pending market top when it posts readings above 80. Likewise, the MFI flags potential market bottoms or oversold conditions when it registers readings of 20 or lower.

The Money Flow Index also has a tendency to track the market trend in the same way as price. As such, any emerging discrepancies between the MFI and price are indicative that a change in the current price direction is imminent. For instance, if price is rising but MFI has begun to drop, the probability of a price reversal is high.

Very simply and outlining the procedure only, the Money flow Index is calculated as follows. First the average price is determined which is then multiplied by Volume. A Money ratio is then calculated using the resultant value. Finally, the Money Flow Index is evaluated and ranged between 1 and 100.

The Money Flow Index is best used in the following ways to detect potential trading opportunities.

When Money Flow Index registers a value over 80 then this is selling signal especially if it retracts back below this value. Likewise, when the MFI records 20 or below then this is a buying opportunity especially if it rises back above this value.

If the Money Flow Index and the price action start to diverge with the MFI moving in the opposite direction to the price, then this can often be a leading indicator of a change in the current trend. As such, this is a strong indication that the price will reverse to follow the Money Flow Index in the very near future.

However, care must be taken when using this Money Flow Index because even though, for instance, the MFI may be registering an overbought condition, the market does not know this. As such, despite the MFI posting a value of 87, for example, the market could still rally higher by 100s of points whilst the MFI only records an increase of just a few points.

Money Flow Index - MFI Indicator.

Money Flow Index Definition.

Money Flow Index ( MFI ) is a technical indicator developed to estimate money inflow intensity into a certain asset by comparing price increases and decreases over a given period, but also taking into consideration trading volumes.

How to use Money Flow Index in trading platform.

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How to Use Money Flow Index.

The indicator can be used to identify whether an asset is overbought or oversold, as well as to determine possible turning points.

Analyzing extreme (overbought/oversold) areas:

If MFI climbs above 80, the asset is generally considered to be overbought. A sell signal appears if MFI crosses the overbought area boundary from above; If MFI drops below 20, the asset is generally considered to be oversold. A buy signal appears if MFI crosses the oversold area boundary from below.

Divergence patterns analysis:

Rising MFI along with decreasing prices indicates the downtrend may be weakening; Falling MFI along with rising prices indicates the uptrend may be weakening.

Money Flow Index (MFI) Indicator.

Money Flow Index Formula (Calculation)

The following steps are required to calculate the index:

MF – money flow (positive (MF+) if current TP > previous TP, negative (MF-) otherwise);

How to use Money Flow Index in trading platform.

Use indicators after downloading one of the trading platforms, offered by IFC Markets.

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Money Flow Index (MFI)

The MF ( Money Flow Index ) compares the value traded on up-days to value traded on down-days and anticipates trend weakness and any points of reverse shift. It is a volume-weighted variant of the Relative Strength Index.

1) Measure Money Flow for every time period:

Typical Price * Volume.

2) Measure Typical Price for every time period:

(High + Low + Close) / 3.

Make decision on the time period over which to measure the index which should be based on the cycle that you are trading.

3) Measure Negative Money Flow: Add Money Flow for every period (in the time period) that Typical Price shifts down.

4) Measure Positive Money Flow: Add Money Flow for every period (in the time period) that Typical Price shifts up.

5) Measure the Money Flow Index: 100 - 100 / (1+ Money Ratio)

6) Measure the Money Ratio: Negative Money Flow / Positive Money Flow.

That is why Money Flow Index ( MFI ) is an indicator, which depicts the intensity the money, is invested in a commodity or withdrawn from it. Forming and interpreting this indicator resemble those of RSI; the distinction is that the MFI also refers to volume.

It's important to remember while analyzing the MFI:

Discrepancies between indicator and price shift If prices grow and MFI decreases, the chance of price turning is very high MFI values over 80 and below 20 means respectively about the market foundation or potential high.

Money Flow Index - MFI.

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'

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 three = $24.14.

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.