Money Flow Index
The Money Flow Index (MFI) is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset. It can also be used to spot divergences which warn of a trend change in price. The oscillator moves between 0 and 100.Unlike conventional oscillators such as the Relative Strength Index (RSI), the Money Flow Index incorporates both price and volume data, as opposed to just price. For this reason, some analysts call MFI the volume-weighted RSI.
Money Flow Index (MFI)
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 and it is often used to detect warning signals of price trend changes. Unlike the Relative Strength Index (RSI), MFI incorporates both price and volume data, hence it is sometimes referred to as a volume-weighted RSI.
Origin
The Money Flow Index was introduced by Gene Quong and Avrum Soudack in the 1980s. It was designed to provide a more comprehensive market momentum analysis tool by combining price and volume data.
Categories and Characteristics
MFI has the following key characteristics:
- Overbought/Oversold Signals: When the MFI value exceeds 80, the market may be in an overbought condition; when the MFI value is below 20, the market may be in an oversold condition.
- Divergence Signals: When there is a divergence between the price and MFI trends, it may indicate an impending price trend reversal.
- Combination of Price and Volume: Unlike RSI, MFI considers both price changes and volume data, making it potentially more accurate in certain situations.
Specific Cases
Case 1: Suppose a stock's MFI value remains above 85 for several days, indicating that the stock may be in an overbought condition. Investors might consider selling or waiting for a price pullback.
Case 2: If a stock's price is rising but the MFI value is declining, this divergence may signal an impending price reversal, prompting investors to act cautiously.
Common Questions
Q1: How is MFI different from RSI?
A1: MFI incorporates both price and volume data, whereas RSI only considers price changes. Therefore, MFI may provide a more comprehensive market momentum analysis in certain situations.
Q2: How to interpret MFI values?
A2: MFI values range between 0 and 100. Values above 80 are generally considered overbought, while values below 20 are considered oversold.
