Money flow index

     
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What Is the Money Flow Index (MFI)?

The Money Flow Index (MFI) is a technical oscillator that uses price và volume data for identifying overbought or oversold signals in an asset. It can also be used khổng lồ spot divergences which warn of a trover change in price. The oscillator moves between 0 và 100.


Unlượt thích conventional oscillators such as the Relative sầu StrengthIndex (RSI), the Money Flow Index incorporates both price and volume data, as opposed khổng lồ just price. For this reason, some analysts Hotline MFI the volume-weighted RSI.


The Money Flow Index (MFI) is a technical indicator that generates overbought or oversold signals using both prices và volume data.An MFI reading above 80 is considered overbought and an MFI reading below đôi mươi is considered oversold, although levels of 90 and 10 are also used as thresholds.A divergence between the indicator & price is noteworthy. For example, if the indicator is rising while the price is falling or flat, the price could start rising.
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The Formulas for the Money Flow Index Are:

MoneyFlowIndex=100−1001+MoneyFlowRatiowhere:MoneyFlowRatio=14PeriodPositiveMoneyFlow14PeriodNegativeMoneyFlowRawMoneyFlow=TypicalPrice*VolumeTypicalPrice=High+Low+Close3eginaligned & extMoney Flow Index=100-frac1001+ extMoney Flow Ratio\ & extbfwhere:\ & extMoney Flow Ratio=frac ext14 Period Positive Money Flow ext14 Period Negative sầu Money Flow\ & extRaw Money Flow= extTypical Price * Volume\ & extTypical Price=frac extHigh + Low + Close3\ endaligned​MoneyFlowIndex=100−1+MoneyFlowRatio100​where:MoneyFlowRatio=14PeriodNegativeMoneyFlow14PeriodPositiveMoneyFlow​RawMoneyFlow=TypicalPrice*VolumeTypicalPrice=3High+Low+Close​​


When the price advances from one period to lớn the next Raw Money Flow is positive sầu and it is added lớn Positive Money Flow. When Raw Money Flow is negative because the price dropped that period, it is added to lớn Negative Money Flow.


How lớn Calculate the Money Flow Index

There are several steps for calculating the Money Flow Index. If doing it by hand, using a spreadsheet is recommended.


Calculate the Typical Price for each of the last 14 periods.For each period, mark whether the typical price was higher or lower than the prior period. This will tell you whether Raw Money Flow is positive or negative sầu.Calculate Raw Money Flow by multiplying the Typical Price by Volume for that period. Use negative sầu or positive sầu numbers depending on whether the period was up or down (see step above).Calculate the Money Flow Ratio by adding up all the positive money flows over the last 14 periods and dividing it by the negative money flows for the last 14 periods.Calculate the Money Flow Index (MFI) using the ratio found in step four.Continue doing the calculations as each new period ends, using only the last 14 periods of data.

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What Does the Money Flow Index Tell You?

One of the primary ways khổng lồ use the Money Flow Index is when there is a divergence. A divergence is when the oscillator is moving in the opposite direction of price. This is a signal of a potential reversal in the prevailing price trkết thúc.


For example, a very high Money Flow Indexthat begins to lớn fall below a reading of 80 while the underlying security continues khổng lồ climb is a price reversal signal to the downside. Conversely, a very low MFI reading that climbs above a reading of đôi mươi while the underlying security continues khổng lồ sell off is a price reversal signal khổng lồ the upside.


Traders also watch for larger divergences using multiple waves in the price & MFI. For example, a stock peaks at $10, pulls baông chồng to $8, và then rallies to lớn $12. The price has made two successive sầu highs, at $10 and $12. If MFI makes a lower higher when the price reaches $12, the indicator is not confirming the new high. This could foreshadow a decline in price.


The overbought & oversold levels are also used khổng lồ signal possible trading opportunities. Moves below 10 và above 90 are rare. Traders watch for the MFI lớn move sầu back above 10 to lớn signal a long trade, & to lớn drop below 90 to lớn signal a short trade.


Other moves out of overbought or oversold territory can also be useful. For example, when an asphối is in an uptrkết thúc, a drop below 20 (or even 30) and then a rally back above it could indicate a pullbaông xã is over và the price uptrover is resuming. The same goes for a downtrkết thúc. A short-term rally could push the MFI up lớn 70 or 80, but when it drops baông xã below that could be the time lớn enter a short trade in preparation for another drop.


The Difference Between the Money Flow Index and the Relative Strength Index (RSI)

The MFI & RSI are very closely related. The main difference is that MFI incorporates volume, while the RSI does not. Proponents of volume analysis believe sầu it is a leading indicator. Therefore, they also believe that MFI will provide signals, & warn of possible reversals, in a more timely fashion than the RSI. One indicator is not better than the other, they are simply incorporating different elements and will, therefore, provide signals at different times.


Limitations of the Money Flow Index

The MFI is capable of producing false signals. This is when the indicator does something that indicates a good trading opportunity is present, but then the price doesn"t move sầu as expected resulting in a losing trade. A divergence may not result in a price reversal, for instance.


The indicator may also fail to warn of something important. For example, while a divergence may result in a price reversing some of the time, divergence won"t be present for all price reversals. Because of this, it is recommended that traders use other forms of analysis & risk control & not rely exclusively on one indicator.


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