Name, Sometimes Called:
Money Flow Index
Often abbreviated MFI
Brief Description:
The Money Flow Index measures the strength of money
flowing into and out of a security. It is a cousin of the Relative
Strength Index (RSI), but also accounts for volume, whereas RSI
only addresses prices.
Definitions, Formulas:
The Money Flow Index (MFI) creates a ratio of Positive
Money Flow and Negative Money Flow over time and scales it to a
number between 0 and 100. The MFI value can be used to evaluate
overbought
and oversold
conditions in a security. The index moves above or below a certain
reference level (often 80 for overbought
and 20 for oversold).
The MFI accounts for both volume and prices, unlike its cousin the
Relative Strength Index (RSI), which examines prices alone.
To calculate it, select a period (call it current), and find its
high, low, close, and volume.
Next, calculate the period’s so-called Typical Price, TP:
TP = (High + Low + Close) / 3
Then calculate a Money Flow (MF) value:
MF = TP * Volume
Determine the Money Flow sign as follows:
If TPCURRENT > TPPREVIOUS,
MF = MFPOSITIVE
If TPCURRENT < TPPREVIOUS,
MF = MFNEGATIVE
If TPCURRENT = TPPREVIOUS,
discard this MF value
Then calculate (over the number of periods to be analyzed; we
use 14 days)
Positive Money Flow = Total MFPOSITIVE
Negative Money Flow = Total MFNEGATIVE
Money Ratio = (Positive Money Flow) / (Negative Money Flow)
Finally,
MFI = 100 – [100 / (1 + Money Ratio)]
Positive Development Calculation:
For this TAI, a new positive development (NPD)
can occur under two different conditions:
(1) Divergence: prices are declining while the MFI is rising.
Measure from peak to peak or from valley to valley.
OR
(2) Oversold: when the MFI crosses above 21 after being below
20.
Similarly, this TAI is no longer positive under either of the
following conditions:
(1) Divergence: EITHER (a) the price and the MFI are moving in
the same (parallel) direction, OR (b) the price is increasing and
the MFI is decreasing.
OR
(2) Oversold: EITHER (a) the MFI crosses above 79 (now overbought),
OR (b) the MFI crosses below 20 (too oversold).
If this TAI is still positive tomorrow, it will no longer be new,
but will be a cumulative positive development (CPD).
If this TAI was a new positive development (NPD)
yesterday, and is still positive today, then it becomes a cumulative
positive development (CPD).
History:
The Money Flow Index was developed by Laszlo Birinyi,
Jr. as a real-time variation on the On-Balance
Volume TAI.
Whereas OBV relates volume
only to closing price, MFI uses the high, low, and closing prices.
OBV ignores the price and any market movement up or down while MFI
weights the volume by price.
The Money Flow Index ranges from 0 to 100. Just like the RSI,
a stock is considered overbought
in the 70 to 80 range and oversold
in the 20 to 30 range.
The shorter the period, the more volatile the Money Flow is likely
to be. So MFI is best used over medium to long periods.
MFI is a volume-weighted relative strength index. It is effective
for both stock and company selection because it gives a view of
a market's essential strength or weakness. Normally, MFI shows the
same trends as the price pattern, indicating that, in an uptrend,
money is flowing into the market, and when prices fall, money is
flowing out of the market.
The first chart below shows the Money Flow Index indicator using
the divergence of price (declining) and MFI (rising) to create a
new positive development on 3/23/2004. As soon as the price starts
to rise and MFI continues to rise there is no divergence and this
is no longer a positive development.
Why is there no red line indicating the date of this? Because
the duration of a trend is a very subjective determination. Notice
the indicated price declining trend is a different duration than
the indicated MFI rising trend. The NLPD could be two days or two
weeks.
In the chart below the Money Flow Index is shown using the crossover
version to set a new positive development when MFI crosses over
21 after having been below 20. In this mode MFI is no longer a positive
development when it crosses over 79. This could have been on 12/31/2004,
but MFI retreated almost immediately and the crossover might have
been a whipsaw.
The MFI x+
79 lasted longer in early January 2005. When is a crossover make
MFI no longer a positive development or the beginning of a whipsaw
is subjective. In the case of Panera Bread requiring MFI to be greater
than 79 for a week would have kept you in until mid March 2005 and
a lot higher gain. Perhaps rather than initiate a sell, MFI x+
79 indicates it is time to tighten
your stops.
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