Money Flow Index

Definition

The Money Flow Index (MFI) is a technical oscillator that uses price and volume data to identify overbought or oversold signals of an asset. Its values range between 0 and 100, helping investors assess buying and selling pressure in the market.

Origin

The Money Flow Index was developed by Gene Quong and Avrum Soudack in the 1980s to provide a more comprehensive market analysis tool by combining price and volume data.

Categories and Features

The main feature of the Money Flow Index is its combination of price and volume data, unlike the Relative Strength Index (RSI), which only uses price data. An MFI value above 80 is typically considered an overbought signal, while a value below 20 is considered an oversold signal. Additionally, MFI can predict potential trend reversals by observing divergences between price and MFI.

Case Studies

During the 2008 financial crisis, the MFI for certain stocks showed clear oversold signals, indicating to investors that the market might soon rebound. Another example is the rise of tech stocks in 2017, where the MFI reached overbought areas multiple times before the market experienced short-term corrections.

Common Issues

Investors often misunderstand MFI's overbought or oversold signals as immediate buy or sell signals, overlooking that the market may remain in these areas for some time. Additionally, MFI divergence signals are not always accurate and should be confirmed with other indicators.