Money Flow
Encyclopedia
Money Flow Index is an oscillator
calculated over an N-day period, ranging from 0 to 100, showing money flow on up days as a percentage of the total of up and down days. Money flow in technical analysis
is typical price multiplied by volume, a kind of approximation to the dollar value of a day's trading.
The calculations are as follows. The typical price for each day is the average of high, low and close,
Money flow is the product of typical price and the volume on that day.
Totals of the money flow amounts over the given N days are then formed. Positive money flow is the total for those days where the typical price is higher than the previous day's typical price, and negative money flow where below. (If typical price is unchanged then that day is discarded.) A money ratio is then formed
From which a money flow index ranging from 0 to 100 is formed,
This can be expressed equivalently as follows. This form makes it clearer how the MFI is a percentage,
MFI is used as an oscillator. A value of 80 is generally considered overbought, or a value of 20 oversold. Divergences between MFI and price action are also considered significant, for instance if price makes a new rally high but the MFI high is less than its previous high then that may indicate a weak advance, likely to reverse.
It will be noted the MFI is constructed in a similar fashion to the relative strength index
. Both look at up days against total up plus down days, but the scale, i.e. what is accumulated on those days, is volume (or dollar volume approximation rather) for the MFI, as opposed to price change amounts for the RSI.
It's important to be clear about what "money flow" means. It refers to dollar volume, i.e. the total value of shares traded. Sometimes finance commentators speak of money "flowing into" a stock, but that expression only refers to the enthusiasm of buyers (obviously there's never any net money in or out, because for every buyer there's a seller of the same amount).
For the purposes of the MFI, "money flow", i.e. dollar volume, on an up day is taken to represent the enthusiasm of buyers, and on a down day to represent the enthusiasm of sellers. An excessive proportion in one direction or the other is interpreted as an extreme, likely to result in a price reversal.
Oscillator (technical analysis)
An oscillator is a technical analysis indicator that varies over time within a band . Oscillators are used to discover short-term overbought or oversold conditions....
calculated over an N-day period, ranging from 0 to 100, showing money flow on up days as a percentage of the total of up and down days. Money flow in technical analysis
Technical analysis
In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...
is typical price multiplied by volume, a kind of approximation to the dollar value of a day's trading.
The calculations are as follows. The typical price for each day is the average of high, low and close,
Money flow is the product of typical price and the volume on that day.
Totals of the money flow amounts over the given N days are then formed. Positive money flow is the total for those days where the typical price is higher than the previous day's typical price, and negative money flow where below. (If typical price is unchanged then that day is discarded.) A money ratio is then formed
From which a money flow index ranging from 0 to 100 is formed,
This can be expressed equivalently as follows. This form makes it clearer how the MFI is a percentage,
MFI is used as an oscillator. A value of 80 is generally considered overbought, or a value of 20 oversold. Divergences between MFI and price action are also considered significant, for instance if price makes a new rally high but the MFI high is less than its previous high then that may indicate a weak advance, likely to reverse.
It will be noted the MFI is constructed in a similar fashion to the relative strength index
Relative strength index
The Relative Strength Index is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period...
. Both look at up days against total up plus down days, but the scale, i.e. what is accumulated on those days, is volume (or dollar volume approximation rather) for the MFI, as opposed to price change amounts for the RSI.
It's important to be clear about what "money flow" means. It refers to dollar volume, i.e. the total value of shares traded. Sometimes finance commentators speak of money "flowing into" a stock, but that expression only refers to the enthusiasm of buyers (obviously there's never any net money in or out, because for every buyer there's a seller of the same amount).
For the purposes of the MFI, "money flow", i.e. dollar volume, on an up day is taken to represent the enthusiasm of buyers, and on a down day to represent the enthusiasm of sellers. An excessive proportion in one direction or the other is interpreted as an extreme, likely to result in a price reversal.
Similar indicators
Other Price × Volume indicators:- On-balance Volume
- Price and Volume TrendPrice and Volume TrendVolume–price trend is a technical analysis indicator intended to relate price and volume in the stock market...
- Accumulation/distribution indexAccumulation/distribution indexAccumulation/distribution index is a technical analysis indicator intended to relate price and volume in the stock market.-Formula:This ranges from -1 when the close is the low of the day, to +1 when it's the high. For instance if the close is 3/4 the way up the range then CLV is +0.5...