Money Flow Index

The Money Flow Index is essentially an RSI that incorporates volume — which is why it's often called the "volume-weighted RSI." Developed by Gene Quong and Avrum Soudack, MFI combines price and volume data to produce a bounded oscillator (0-100) that measures the intensity of buying and selling pressure.

The calculation starts with the "typical price" (average of high, low, close) for each period. If the typical price is higher than the previous period, the money flow is "positive." If lower, it's "negative." Each flow is then multiplied by volume, creating "money flow" values that quantify the dollar amount flowing into or out of the market. The ratio of positive to negative money flow over 14 periods (the standard setting) is then normalized to the 0-100 scale.

By incorporating volume, MFI often produces more reliable signals than pure price-based oscillators. An overbought reading on RSI tells you price has risen rapidly, but an overbought reading on MFI tells you that a significant volume of money has moved in. The distinction matters: a price rally on thin volume is fragile, while a rally supported by strong volume has conviction behind it. MFI captures this nuance.

The standard thresholds are 80 (overbought) and 20 (oversold), though some traders tighten these to 90/10 for higher-conviction signals. When MFI rises above 80, it suggests the market has absorbed a large amount of buying volume and may be exhausted. Below 20, selling volume has been extreme and the market may bounce.

MFI divergence is considered one of the most reliable volume-based signals. When price pushes to a new high but MFI doesn't follow, it means the new high was achieved on less volume conviction than the previous one — the smart money may already be exiting. This "volume divergence" often provides earlier warnings than price-only divergence signals.

A useful MFI technique is watching for "failure swings." A bullish failure swing occurs when MFI drops below 20 (oversold), bounces up, pulls back but stays above 20, then breaks above the bounce high. This pattern shows that selling pressure has been fully absorbed and buyers are taking control. Combined with a price breakout above resistance, it creates a high-probability long setup.

The MFI extreme reversal strategy uses tighter thresholds (90/10 instead of 80/20) for higher conviction. When MFI reaches above 90 and then drops below 90, enter short. When it drops below 10 and rises above 10, enter long. These extreme readings indicate maximum buying or selling pressure has been reached — exhaustion that typically leads to reversals. Combine with a candlestick confirmation for timing.

For trend confirmation, use MFI as a volume-weighted momentum filter. In an uptrend, MFI should be above 50 and ideally making higher lows. If MFI drops below 40 during an uptrend, it warns that buying volume is drying up — consider tightening stops. This volume perspective adds information that pure price-based indicators can't provide.

The MFI-RSI comparison strategy uses both indicators simultaneously. When RSI shows overbought (above 70) but MFI does not (below 80), the price rally lacks volume support — likely a false move. When both RSI and MFI agree on overbought conditions, the signal is more reliable. This cross-referencing technique produces higher-quality signals than using either indicator alone.