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.
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.
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.
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.