About the MFI
The MFI compares the ratio of "positive" money flow to the
"negative" money flow. If a typical price today is greater than yesterday,
it is considered positive money. If a typical price today is lower than
yesterday, it is considered negative money.
The Typical Price is calculated by the following formula:
Typical Price = ( (Day High + Day Low + Day Close) / 3)
For a 14-day average, the sum of all positive money for
those 14 days is the positive money flow and the sum of the negative money
for those 14 days is the negative money flow.
Positive Money Flow = sum[ (Positive
Typical Price) x (Volume) ]
and
Negative Money Flow = sum[ (Negative
Typical Price) x (Volume) ]
The MFI is based on
the ratio of positive/negative money flow (Money Ratio).
Money Ratio = (Positive Money Flow / Negative Money Flow)
Finally, the MFI can be calculated using this ratio:
Money Flow Index = 100 - (100 / (1 + Money Ratio))
The fewer number of days used to calculate the MFI, the more volatile
it will be.
Using MFI
The MFI (money flow index) could be analyzed in the
similar to RSI analysis way.
In the same way as with the RSI, the MFI can be used to
determine how much volume is associated with a security. If the MFI
indicator reaches 80 and above (a bearish reading) a stock is considered
"overbought" and a bullish reading of 20 and below suggests a stock is
"oversold".
Positive and negative divergences between the security and
the MFI can be used as buy and sell signals respectively.
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