The Money Flow Index explained simply
The Money Flow Index is an RSI with volume. It shows whether more money changed hands on up days or on down days, on a scale from 0 to 100.
Gene Quong and Avrum Soudack developed the Money Flow Index, MFI for short, in the late 1980s. It answers the same question as the RSI, but weights each day by how much money was traded. A rise on heavy trading counts more than one on light trading.
What it's about
The MFI lies between 0 and 100. Above 80 counts as overbought, below 20 as oversold. These limits sit further out than for the RSI because the MFI swings more.
An example: a stock rises slightly on three days, but on light trading, and falls clearly on two days on high volume. The RSI might show a balanced picture, the MFI more of an outflow.
How it's calculated
For each day you take the typical price, the average of high, low and close, and multiply it by the volume. That's the day's money flow. If the typical price is higher than the day before, the flow counts as positive, otherwise as negative. Over 14 days you divide the sum of positive flows by the sum of negative flows and convert that to 0 to 100 like the RSI.
With numbers: over 14 days, €6 million flowed positive and €2 million negative. The ratio is 3, so the MFI is 100 minus 100 divided by 4, which is 75.
What signals traders read from it
- Overbought and oversold: Below 20 some hope for a recovery, above 80 some expect a pullback.
- Divergence: The price rises to a new high but the MFI doesn't. Then less money is behind the rise.
- Confirmation: When price and MFI rise together, the rise counts as backed by money.
Where it misleads you
The MFI has the same weaknesses as the RSI. In strong trends it stays in extreme territory for a long time, and reversal signals against the trend often go wrong. On top of that come the weaknesses of volume, which can be incomplete depending on the data source, and with crypto even inflated.
A single day with huge volume, such as an index change, can distort the MFI for two weeks.
An example trade with made up numbers
Lara has €10,000 in her account and risks at most €150 per trade. A stock's MFI falls below 20 and then climbs back above it. Lara buys at €35 and sets her stop loss at €33.50. With that distance, she buys 100 shares for €3,500. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.
If it works: The stock recovers and Lara sells at €37. Lara is €200 ahead. After €2 in fees and €4 in spread, €194 is left.
If it goes wrong: The outflow continues. The stop fills at €33.40. That's a €160 loss, €166 with costs.
Lara chose a modest target. That makes her possible gain smaller than her possible loss. This can only pay off if such trades work for her much more often than not.
Quong and Soudack introduced the MFI in 1989. It's one of the indicators that combine price and volume, like OBV or Chaikin Money Flow.
Formally: typical price TP = (H + L + C) / 3, money flow = TP × volume. Positive flow if today's TP is higher than yesterday's, otherwise negative. Money ratio = sum of positive / sum of negative over 14 periods, MFI = 100 − 100 / (1 + money ratio).
As with all volume based values, the result depends on which trading venues are in the data. So two charting tools can show different MFI values for the same stock.
Summary
- The MFI is an RSI that counts volume.
- Above 80 counts as overbought, below 20 as oversold.
- It inherits the weaknesses of both the RSI and volume.
Did you get it?
What makes the MFI different from the RSI?
The MFI weights each day by the money traded, the RSI only counts the price change.
Positive money flow €6 million, negative €2 million. Where is the MFI?
At 75.
Why can a single day distort the MFI for a long time?
Because a day with huge volume stays in the calculation for 14 days.
Sources and further reading
- StockCharts ChartSchool, Money Flow Index. View source ↗
- ESMA, investor information on trading risks. View source ↗