What is the Money Flow Index (MFI)? And How to use it?

The Money Flow Index, or MFI, is a technical indicator used to measure the inflow and outflow of funds in a market over a specific period.

The calculation of the Money Flow Index takes into account both the price and trading volume of a stock. Specific calculations are used to evaluate the movement of the stock, such as identifying whether the stock is overbought or oversold and whether a price turning point has occurred.

Properly applied, MFI can help you identify potential trend reversal points, providing valuable insights into your trading decisions.

The value of the Money Flow Index (MFI) ranges between 0 and 100.
Generally, the MFI value increases with the stock price and decreases when the stock price declines.

When the MFI > 80, the stock is usually considered overbought, while when the MFI < 20, the stock is considered oversold.

If there is a rise in the stock price but the MFI value starts to fall, it means that bearish sentiment is gradually dominating the market and the possibility of a price turning point is very high.

The MFI is similar to another commonly used technical indicator, the Relative Strength Indicator (RSI). But while the RSI only takes into account the price of a stock, the MFI considers both the price volatility and trading volume of the stock, and its criteria for evaluating a stock’s price differ from those of the RSI.

For the MFI, the evaluation criteria values are usually 20 and 80, while for the RSI they are 30 and 70.

How to Calculate the Money Flow Index

The Money Flow Index (MFI) is calculated using stock price and trading volume data over a specific period, generally 14 trading days. This calculation involves the following five steps:

Calculate Typical Price (TP)

The Typical Price (TP) is the average of the low, high, and closing prices of a trading day. The formula is:

Calculate the Money Flow

The Money Flow is calculated by multiplying the Typical Price by the Trading Volume for the day. The formula is:

Classify Positive and Negative Money Flow

• If the Typical Price of the current day is higher than the Typical Price of the previous day, it is recorded as Positive Money Flow.
• If the Typical Price of the current day is lower than the Typical Price of the previous day, it is recorded as Negative Money Flow.

Calculate the Money Flow Ratio

The Money Flow Ratio measures the direction of money flow in the market. It is calculated by dividing the n-day cumulative positive fund flows with the n-day cumulative negative fund flows cumulatively, i.e.:

where n is generally chosen to be 14 days.

Calculate the Money Flow Index (MFI)

Substitute the Money Flow Ratio into the following formula to calculate the MFI:

The MFI ranges from 0 to 100.

• When the MFI is above 80, the market is considered overbought, indicating that stock prices may be at risk of a pullback.
• When the MFI is below 20, the market is considered oversold, suggesting a potential opportunity for a rebound in stock prices.

Key Notes:

The MFI is not an absolute buy or sell signal. Instead, it serves as a secondary tool to analyze market sentiment and money flows, complementing other technical indicators.

Example of MFI Calculation

The following data was obtained from Apple’s investor website for the first 14 trading days ending July 6. The calculations include typical price formulas and money flow formulas.

In the Typical Prices column, prices above the previous trading day’s Typical Price are marked in green, and prices below the previous trading day’s Typical Price are marked in red.

Correspondingly, Positive Money Flow is labeled in green, and Negative Money Flow is marked in red.

This results in:

• Positive Money Flow: $113,518.59 million
• Negative Money Flow: $46,020.57 million (over 14 days).

Calculate the Money Flow Ratio:

Calculate the MFI:

So, Apple had an MFI of 71.15 on July 6 in a 14-day cycle.

What is the use of the MFI?

The Money Flow Index (MFI) is used to evaluate the price movement of a stock, determine whether the price is overbought or oversold, and identify whether a turning point in the price is imminent.

Determining Whether a Stock is Overbought or Oversold

For most stock price movements, 20 and 80 are standard values used to determine oversold or overbought conditions:

• When the MFI value rises above 80, the stock is considered to be overbought. This means the current price has exceeded the level at which it is appropriate to buy. It is not recommended to continue buying, but selling may be appropriate.
• When the MFI value falls below 20, the stock is considered oversold. This indicates the current price has fallen below the level at which it is appropriate to sell. Selling is not recommended; instead, holding or buying might be suitable.

Important Note: The values 80 and 20 are not absolute guidelines.

• If the stock’s MFI value remains above 80 for a sustained period, 90 can be used as the benchmark for overbought conditions. For instance, if the stock’s MFI value exceeds 90, it is judged to have entered an overbought state.
• Similarly, if the stock is in a strong downtrend and the MFI remains below 20 for an extended period, 10 can be used as the benchmark for oversold conditions. In this case, a stock is considered oversold only if its MFI falls below 10.

Determining Stock Price Trends

In general, the numerical trend of the MFI corresponds to the stock price trend. However, if the two trends move in opposite directions, it is usually regarded as a signal of a potential price reversal:

When the stock price continues to fall and the MFI starts to rise, it indicates that the flow of money is increasing. Buyers are gradually entering the market, and the price may soon reverse upward from the bottom.

When the stock price continues to rise and the MFI begins to fall, it suggests that sellers are increasing their activity. The stock price may turn downward, signaling an opportunity for short sellers to establish positions.

Recognizing Potential Top and Bottom Reversal Signals

The MFI can also help identify potential reversal signals at market tops and bottoms:

When stock prices reach new highs but the MFI fails to follow, this could signal a top divergence. It indicates that buying power in the market is weakening, and stock prices may pull back.

Similarly, when stock prices reach new lows but the MFI fails to follow, this could signal a bottom divergence. It suggests that selling pressure is weakening, and stock prices may rebound.

Key Considerations

It is essential to note that the MFI is not an absolute buy or sell signal. Instead, it serves as a tool to help understand market sentiment and money flows.

When using the MFI, consider incorporating other technical indicators (e.g., moving averages, Relative Strength Index) and fundamental analysis to form a comprehensive market view.

Using MFI with Other Technical Indicators

Using the Money Flow Index (MFI) in conjunction with other technical indicators provides a more comprehensive and accurate market analysis. By combining multiple indicators, you can address the limitations of a single indicator, improving forecasting accuracy and trading success.

For example, the MFI focuses on inflows and outflows of funds, while Moving Averages reflect price trends and the Relative Strength Index measures price momentum.

By using these indicators together, you can gain a more complete understanding of market trends, momentum, and participant sentiment.

Example of Using MFI with Other Technical Indicators

Below is an example of how the MFI can be used in conjunction with other technical indicators, as seen in the TradeUP Securities App:

1. Identifying Overbought and Oversold Conditions with MFI

• When the MFI > 80, the market may be overbought.
• When the MFI < 20, the market may be oversold.

2. Confirming Trends with Moving Averages

Observe the stock price relative to short-term (e.g., 20-day) and long-term (e.g., 50-day or 200-day) moving averages.

• When the price is above both short-term and long-term moving averages, the market is in an uptrend.
• When the price is below both short-term and long-term moving averages, the market is in a downtrend.

3. Assessing Momentum with the Relative Strength Index (RSI)

• When the RSI > 70, it may indicate the market is overheated and at risk of a pullback.
• When the RSI < 30, it may indicate the market is oversold and there is potential for a rebound.

Combining Indicators for a Comprehensive Strategy

By integrating these indicators, you can develop a more robust trading strategy:

Overbought Scenario:

When the MFI is overbought, the stock price is above both the short-term and long-term moving averages, and the RSI is above 70:

• This signals the market is at risk of a pullback.
• You may consider reducing your positions or staying on the sidelines.

Oversold Scenario:

When the MFI is oversold, the stock price is below both the short-term and long-term moving averages, and the RSI is below 30:

• This signals the market may be poised for a rebound.
• You may consider adding to a position or looking for a buying opportunity.

Using the MFI alongside other indicators can help traders develop well-informed strategies that consider multiple facets of market behavior.

How to find the MFI?

Using Apple (Ticker: AAPL) as an example, here’s a step-by-step guide to locating the Money Flow Index (MFI) in the TradeUP Securities mobile app:

You need to open a TradeUP account to access the money flow data for any stock.

Open the TradeUP app, search for the stock AAPL, and navigate to the AAPL stock page, as shown in the screenshot below.

In the [Overview] section, locate the real-time price chart of the stock. Click the upper-right corner of the chart to find the [Full Screen] option. Tap it to expand the chart.

In the full-screen K-chart view of AAPL, locate the indicator options on the right-hand side. Find and select MFI (Money Flow Indicator). Once selected, you will see the MFI indicator line displayed at the bottom of the K chart.

For example, on April 6, 2023, the MFI for AAPL reached 88.08 at the market close, as shown in the chart.

Exit the full-screen display to return to the stock’s main page. The MFI indicator will now be displayed alongside other stock details for continuous reference.

How is the MFI Related to the RSI?

The Money Flow Index (MFI) and Relative Strength Index (RSI) are both technical indicators that measure the price movement of a stock, assessing whether a stock is overbought or oversold by using upper and lower bound values.

MFI Calculation:

MFI = 100 – [100 / (1 + Money Ratio)]

RSI Calculation:

RSI = 100 – [100 / (1 + (average of stock price increase/average of stock price decrease))]

The main difference between the two is the consideration of the trading volume.

• MFI incorporates both the typical price and volume in its calculation.
• RSI considers only the price movements (rises and falls) for its calculations.

Overbought and Oversold Assessment

• The MFI uses 20 and 80 as an assessment of overbought and oversold, when the MFI is above 80, it means the stock is in overbought status, and below 20, it means the stock is in oversold status.
• The RSI generally uses 30 and 70 as the assessment criteria for overbought and oversold. When the RSI exceeds 70, it indicates that the stock has entered an overbought state, and when the RSI is below 30, it indicates that the stock has entered an oversold stage.

Both thresholds can be adjusted based on market conditions.

For strong price movements, the upper bound can be raised (e.g., MFI ≥ 90 or RSI ≥ 80 for overbought). For weak price movements, the lower bound can be lowered (e.g., MFI ≤ 10 or RSI ≤ 20 for oversold).

Limitations of the MFI

While an MFI above 80 or below 20 is often considered an overbought or oversold condition.

But in a strong trending market, these extremes may persist for longer periods without an immediate price reversal.

For example, in a bull market, the MFI may remain above 80 for an extended period and the stock price may continue to rise. Conversely, in a bear market, the MFI may remain below 20 for an extended period and the stock price may not rally immediately.

Also, divergence signals (e.g., price rises but MFI falls) may not always result in a trend reversal and could be temporary.

In conclusion, MFI should not be used in isolation. You should also consider other technical indicators (e.g. Moving Averages, Relative Strength Index, etc.) as well as fundamentals to get a more comprehensive market analysis.

Disclaimer

NON-INVESTMENT ADVICE: The content provided here is for informational purposes only and does not constitute professional, investment, or financial advice. Always seek professional guidance tailored to your situation.

Risk of Loss: Trading securities and derivatives involves inherent risks, including the loss of principal. Past performance is not indicative of future results.

NON-VALUATION: This material is not an official valuation of any of the securities or derivatives mentioned herein. Any pricing information provided is for informational purposes only and does not reflect the level at which TradeUP is prepared to execute trades; nor is it intended to demonstrate the actual results that may be realized from any trade.

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