The Money Flow Index (“MFI”) is a momentum indicator that measures the strength of money in and out of a instrument. It accounts for volume. Money flow is an indicator that calculates an indexed value based on price and volume for the number of bars specified in the input Length. Calculations are made for each bar with an average price greater than the previous bar and for each bar with an average price less than the previous bar. These values are then indexed to calculate and plot the money flow. The use of both price and volume provides a different perspective from price or volume alone. The money flow indicator tends to show dramatic oscillations and can be useful in identifying overbought and oversold conditions.
It is used to measure the strength of money flowing in and out of an instrument. It is also used to warn of trend weakness and likely reversal points. The indicator compares the value traded on up-periods to value traded on down-periods. If the price trends higher and the MFI trends lower (or vice versa), a reversal may be imminent. MFI can be used to determine if there is too much or too little volume associated with a security. A instrument is considered overbought if the MFI indicator reaches 80 and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and below suggests a instrument is oversold.