What Is Money Flow Index
The money flow index (MFI) is a momentum indicator that measures the inflow and outflow of money into an asset over a specific period of time. The MFI uses a stock’s price and volume to measure trading pressure.
Money Flow Index Indicator
The Money Flow Index is a trend indicator, which uses price and volume data to identify overbought or oversold signals in an asset. Unlike general oscillators, the MFI uses both price and volume data, as opposed to just price.
How To Calculate Money Flow Index
Here’s how to calculate the Money Flow Index
Money Flow Index= 100− (100 / 1+Money Flow Ratio)
Money Flow Ratio= (14 Period Positive Money Flow / 14 Period Negative Money Flow)
Raw Money Flow = Typical Price * Volume
Typical Price = (High + Low + Close) / 3
Why Use Money Flow Index
One of the critical ways MFI is used is when there is a divergence, which is when the oscillator is moving in the opposite direction of price. This is a signal of a potential reversal in the prevailing price trend.
How To Use Money Flow Index
Money Flow Index can be called the volume-weighted version of RSI as it integrates volume and mirrors the relative strength index. Like RSI, MFI above 80 is considered overbought, and MFI below 20 is deemed oversold. Also, the thresholds of 70-30 and 66-33 can be used if a trader can afford to take more risk.
Defining a Bullish Scenario to generate a buy signal:
- When the money flow index crosses above 30, it indicates that the current market prices are oversold; hence one can go long
Defining a Bearish Scenario to generate a sell signal:
- When the money flow index crosses below 70, it indicates that the current market prices are overbought; hence one can go short.
Building Money Flow Index Trading Strategy On Mudrex:
As discussed above, lets first write our entry/exit conditions so that we know what to do:
BUY: When the money flow index crosses above 30.
SELL: When the money flow index crosses below 70
Overall Strategy: The overall strategy on mudrex looks like this
Testing: We can now run a quick back-test to see how our strategy performs
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