MFI (Money flow index)
The Money Flow Index (MFI) indicator is a tool used in technical analysis to measure buying and selling pressure. This is done by analyzing both price and volume. The MFI calculation generates a value, which is then displayed as a line that moves in a range from 20 to 80 making it an oscillator. When the MFI rises, it indicates increased buying pressure. When it falls, it indicates increased pressure from sellers. The money flow index can generate several signals, primarily: overbought and oversold conditions, divergences, and unsuccessful fluctuations.
Oversold levels are usually found below 20 and overbought levels are above 80. These levels can change depending on market conditions. Level lines must cross the highest peaks and lowest troughs. Oversold/overbought levels are usually not a sufficient reason to buy/sell, and traders should consider additional technical analysis or research to confirm the security turning point. Be aware that during strong trends the MFI can remain overbought or oversold for extended periods of time. If the underlying price makes a new high or low that is not confirmed by the MFI, this divergence could signal a price reversal.
Calculation
The Money Flow Index requires a series of calculations.
First, the period's Typical Price is calculated: Typical Price = (High + Low + Close)/3;
Next, Money Flow (not the Money Flow Index) is calculated by multiplying the period's Typical Price by the volume: Money Flow = Typical Price * Volume;
If today's Typical Price is greater than yesterday's Typical Price, it is considered Positive Money Flow. If today's price is less, it is considered Negative Money Flow;
Positive Money Flow is the sum of the Positive Money over the specified number of periods. Negative Money Flow is the sum of the Negative Money over the specified number of periods;
The Money Ratio is then calculated by dividing the Positive Money Flow by the Negative Money Flow: Money Ratio = Positive Money Flow / Negative Money Flow;
Finally, the Money Flow Index is calculated using the Money Ratio.
Main parameters
MFI period – allows setting the time period for which the MFI will be plotted, 14 by default.
The indicator looks as follows:
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