If an apt phra💟se in everyday life is that money talks, then in financial markets, it screams. While many traders focu🔜s only on price, following the money can reveal hidden market shifts that price charts alone might miss.

That's where the money flow index (MFI) comes in, tracking not just what prices do, but how much investor conviction—how much money—stands behind those moves. For example, as prices rise with increasing volume, MFI can confirm that there's genuine buying pressure. But if prices are rising while the MFI fails to follow suit, that can be a warning that the rally is on shaky ground.

When readings climb above 80, that suggests the market might be overheating, or overbought, with too many buyers pushing prices to unsustainable levels, often a signal that sellers may step in to take profits. When readings drop below 20, that indicates the market might be oversold, like a stretched rubber band ready to snap back—potentially a good time for bargain hunters to start looking for deals. We take you through the strategies and cal🎃culations for using the MFI𝓡 below.

What Is the Money Flow Index?

Unlike more intimidating financial formulas, the MFI calculatio⛎n follows a logical sequence that's pretty straightforward. Here's how it works in everyda💖y terms:

1. We find the "typical price" for each trading period by averaging the high, low, and closing prices. This gives us a single price for that period.
2. Next, we determine whether money is flowing in or out by comparing each period's typical price to the previous one. If price moved up, money is flowing in (positive); if price dropped, money is flowing out (negative).
3. We then multiply each period's typical price by its trading volume to calculate "raw money flow," showing us how much money actually moved. The positive and negative money flows are tracked separately over 14 periods.
4. We add all the positive money flows over the 14-period window and separately total all the negative money flows.
5. Finally, we calculate the money flow ratio (fitting a 0 to 100 scale) by dividing the sum of positive money flows by the sum of negative money flows.
6. As each new period ends, we recalculate the MFI using the most recent 14 periods of data.

This combination of price moves and volume proꦏvides a fuller picture of sentiment in the market than either factor could provide alone. When significant volume accompanies price moves, 💎MFI gives those moves more weight, reflecting real-world trading where conviction matters as much as direction.

Calculating the MFI

More precisely, here are the formulas behind the MFI:

$\begin{aligned} &\text{Money Flow Index}=100-\frac{100}{1+\text{Money Flow Ratio}}\\ &\textbf{where:}\\ &\text{Money Flow Ratio}=\frac{\text{14 Period Positive Money Flow}}{\text{14 Period Negative Money Flow}}\\ &\text{Raw Money Flow}=\text{Typical Price * Volume}\\ &\text{Typical Price}=\frac{\text{High + Low + Close}}{3}\\ \end{aligned}$​Money Flow Index=100−1+Money Flow Ratio100​where:Money Flow Ratio=14 Period Negative Money Flow14 Period Positive Money Flow​Raw Money Flow=Typical Price * VolumeTypical Price=3High + Low + Close​​

When price moves higher from ꦑone period to the next, raw money flow is considered positive and ge𝓰ts added to the positive money flow total. Meanwhile, when prices are dropping, that period's raw money flow is negative and gets added to the negative money flow bucket. This separation helps track whether money is predominantly flowing into or out of an asset over the measurement period.

How To Interpret the MFI's Signals

The most helpful MFI signals come from divergence—when price and money flow move in opposite directions, often foreshadowing reversals before most traders spot them. Suppose a stock is climbing to new highs while the MFI fails to match its previous peaꦡk. This divergence suggests that despite rising prices, buyer enthusiasm is waning—institutional investors might be quietly distributing shares while retail investors continue buying. When this happens, those using the MFI prepare for a potential decline in the stock price.

The opposite scenario is equally helpful. When prices hit lower lows, but the MFI is at higher lows, this could indicate that selling pressure is tiring out while accumulation starts up beneath the surface. This positive divergence often precedes 澳洲幸运5官方开奖结果体彩网:bullish reversals that can catch bearish traders off guard.

💞Beyond divergences, extreme MFI readings can act as your early warning system. While a reading above 80 signals overbought and a rea💧ding below 20 signals undersold, momentum can often keep price going even with readings at those levels.

On the other hand, readings above 90 signal exceptional buying pressure that's rarely sustainable, creating prospects for 澳洲幸运5官方开奖结果体彩网:contrarian traders looking to sell into strength. Meanwhile, readings under 10 could indꦰica♓te panic selling, which means you have a pickup prospect while others are fleeing.

The MFI can also help identify when pullbacks within larger trends might be ending. During uptrends, MFI dips to the 40 range might offer solid entry points. Likewise, during a downtrend, 澳洲幸运5官方开奖结果体彩网:relief rallies that push the♏ MFI to around 60 could prese🌃nt a good prospect for short selling. Some traders will wait for an MFI reversal at both of those levels.

MFI vs. RSI: What's the Difference?

The MFI and Relative Strength Index (RSI) are quite similar: both are💯 oscillators with scales of 0 to 100, are used to identify potentially overbought and oversold conditions, and are perha𓄧ps most useful when showing divergence with price.

However, they measure different things. The RSI tracks only price momentum, calculating the speed and magnitude of directional price movements. The MFI incorporates volume as a weighting mechanism, thuꩲs measuring the force behind the 🃏price changes.

This aspect gives MFI p🍒articular value in confirmi🍷ng the strength of trends. When price and volume move in harmony—both rising or both falling—the MFI can generate stronger signals than the RSI, which can miss the increasing participation behind certain price moves.

There are also differences in timing. Because volume often leads price, the MFI often signals potential reversals earlier than the RSI. This can give♍ you valuable time to prepare your trades before major moves appear on the price charts or trigger RSI signals.

Neither indicator always outperforms the other across all market conditions. In trending markets with steady participation, they often move in tandem. But during crucial transition periods—when major investors are quietly accumulating or distributing and the trend shift isn't yet obvious, the MFI's volume sensitivity can be invaluable.

The Bottom Line

The MFI offers traders a way to test how much conviction stands behind the moves seen on price charts. By combining price action with trading volume, MFI helps identify potential reversals through extreme read𒊎ings and divergences that price-only indicatorsꦜ might miss. However, like any technical tool, it works best when combined with other forms of analysis.