Money Flow Index

Money Flow Index

Money Flow Index (MFI) is a momentum indicator that uses both price action and volume in its calculation to measure buying/selling pressure and the potential of a trend reversal.

Based on the measuring method, Money Flow Index can also be considered as a volume-weighted Relative Strength Index (RSI).

The Money Flow Index is an oscillator that moves between 0 and 100 and is used to identify overbought or oversold conditions. It can be used to indicate a buy or sell signal.

Application:

If the MFI is above 80, it indicates the market is overbought, or it may mean the market going to top and possibly a reversal of trend will take place. This is a sell signal.

If the MFI is below 20, it indicates the market is oversold, or it may mean the market is going to bottom and possibly a reversal of trend will take place. This is a buy signal.

Note:

When the index is above 80, this can be interpreted as money flowing into the market in the short-term, but once the index breaks below 80, a capital inflow reversal takes place.

When the index is below 20, this can be interpreted as money flowing out from the market in the short-term, but once the index breaks above 20, a capital outflow reversal takes place.

Conclusion:

Money Flow Index is useful in confirming a market trend and can be used to warn of potential reversals in the market with overbought/oversold levels.  As always, it is best to confirm all buy/sell signals with other indicators.

The Money Flow Index indicator is available on OSK188 and RHBInvest.