Money Flow Index (MFI) | Indicator Series

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Money Flow Index (MFI) is a technical oscillator created by Gene Quong and Avrum Soudack that uses price and volume to gauge the overbought and oversold conditions of a trading asset. It’s very similar to the Relative Strength Index indicator and therefore, can be interpreted in a similar manner. It’s dubbed the volume-weight RSI by many analysts. 

How to Read the MFI Indicator 

The MFI indicator is usually calculated using 14 periods of data. The values are plotted as a line that oscillates between 0 and 100, thus making MFI an oscillator. Click this link to access an economic calendar for your trading strategies 

A value over 80 is typically considered overbought while a value under 20 is considered oversold. These interpretations are not fixed, and many analysts adopt their own interpretation levels. The oscillator creators, Gene Quong and Avrum Soudack suggested an overbought level of 90 and oversold level of 10. These levels are rarely reached, but once they are, a change of direction is imminent. 

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Divergence 

When price and the MFI don’t agree, it’s a sign that an impending reversal is about to happen. There are two types of divergence traders need to pay attention to (Try out indicators on Tradingview.com): 

  • Bullish MFI divergence: When price makes a new low but the MFI indicates a higher low. In this case, the price often reverses and an uptrend will follow. 
  • Bearish MFI divergence: When price makes a new high but the MFI fails to form higher highs. In this case, the asset may reverse and form a downtrend. 

Failure Swings 

You don’t need to use the asset’s price to interpret failure swings. Just like with divergence, there are two cases, each consisting of four steps: 

Bullish MFI Failure Swing 

  • MFI trends down below 20(oversold) 
  • MFI bounces back well above 20 
  • MFI pulls back but still doesn’t go below 20 
  • MFI breaks its previous high 

Bearish MFI Failure Swing 

  • MFI breaks above 80(overbought) 
  • MFI pulls back below 80 
  • MFI rises again but still below 80
  • MFI starts a new downtrend and breaks its previous low 

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