Hello, dear friends. Forex market is a dynamic financial market where global currency trading takes place. We trade in this market to profit from changes in the prices of different currencies. However, the Forex market is quite complex and volatile. Therefore, we use various analysis methods to predict price movements and make right trading decisions. Success in financial markets relies on the ability to understand and forecast price movements. Technical analysis is one method used for this purpose. This type of analysis attempts to predict future price movements by examining past price movements and trading volume. An important component of technical analysis is technical indicators. These indicators are tools that process price data through mathematical calculations. The topic of our current article is the Money Flow Index (MFI) Indicator, which is one of these technical tools.
What is the Money Flow Index (MFI) Indicator?
The Money Flow Index (MFI), or simply MFI, is a momentum indicator that measures the amount of money flowing in and out of a security. In technical analysis, the Money Flow Index is often used to track a combination of price movements and trading volume. This index is also preferred for identifying overbought or oversold conditions of an asset and predicting possible trend reversals. It achieves this by analyzing both price and volume.
The Money
Flow Index (MFI) was first developed by Gene Quong and Avrum Soudack in 1997.
The invention of the MFI is a product of the work of these two financial
professionals in the field of technical analysis. This indicator has become
popular as a tool for examining price movements and trading volume in financial
markets and is widely used for identifying overbought and oversold conditions.
The studies conducted by Gene Quong and Avrum Soudack suggest that the MFI can
assist us in making decisions in technical analysis. MFI and RSI are similar,
but MFI analyzes price movements and trading volume at the same time, while RSI
only focuses on price movements.
Is MFI a Good Indicator?
Honestly, asking if the MFI is "good" is like asking if a hammer is good. It really depends on how you use it and what you want to build! The MFI, which stands for Money Flow Index, is definitely a super useful tool. Think of it as the Relative Strength Index (RSI), but with a turbo boost of volume. The volume part is key. It shows you if the money is actually flowing into or out of a stock, not just if the price is moving. That makes it a strong indicator, especially for spotting the real power behind a trend.
But here's the thing: no indicator is perfect on its own. If you only look at the MFI, you might get "fake signals." For example, the MFI might drop below 20 (oversold), making you think the price is about to shoot up. But if the overall market is crashing, the price might just keep falling. The smart way to use MFI is with other tools.
- Pair it with a moving average to see the main trend.
- Check the Price Action itself.
The MFI is fantastic for finding those divergences we talked about. When the price is going up but the MFI is going down, that's a huge warning sign that the trend is weak. It's like the stock is running on empty. The quick answer? Yes, the MFI is a very good and powerful indicator, but only if you use it as one piece of a bigger puzzle. Don't rely on it alone!
Calculation of the Money Flow Index (MFI)
Money Flow Index (MFI), is like a thermometer that measures
the buying and selling pressure of an asset. By analyzing price movements and
trading volume, it tells us whether an asset is in overbought or oversold
conditions. The Money Flow Index (MFI) is calculated using price movements and
trading volume over a 14-day period. Here are the steps involved in its
calculation:
1. Calculate Typical Price (TP). First, the typical
price for each day is calculated. The typical price is the average of the high,
low, and closing prices and is calculated using the following formula:
TP = (High Price + Low Price + Closing Price) / 3
2. Calculate Money Flow. To calculate the money flow,
we need to determine whether the typical price for that day has increased or
decreased compared to the previous day. If there is an increase compared to the
previous day, it is considered positive money flow and is multiplied by the
day's trading volume. If there is a decrease compared to the previous day, it
is considered negative money flow and is also multiplied by the day's trading
volume.
Positive Money Flow (PMF) calculation:
PMF = TP × Daily Trading Volume (If TP increased, otherwise
0)
Negative Money Flow (NMF) calculation:
NMF = TP × Daily Trading Volume (If TP decreased, otherwise
0)
3. Calculate Money Flow Ratio (MFR). The money flow
ratio calculates the ratio of positive money flow to negative money flow and is
obtained using the following formula:
MFR = PMF / NMF
4. Money Flow Index (MFI) Calculation. Finally, the
Money Flow Index is calculated using the formula MFI = 100 - (100 / (1 + MFR)).
MFI = 100 - (100 / (1 + MFR))
Fortunately, when trading in the financial markets, there is no need for us to perform these calculations manually. The indicator automatically
calculates them and presents the result both as a line and as a numerical
value. The most recent calculated value of the MFI, which is its current value,
is used to assess whether an asset is in overbought or oversold conditions.
When the MFI rises, it indicates an increase in buying pressure. When it falls,
it indicates an increase in selling pressure.
When people try to understand this tool, they often look at the Money Flow Index formula to see what is going on behind the number. In the Money Flow Index formula, everything starts with the typical price, but the real job comes from matching that price with volume. After you add up the money flowing in and the money flowing out, the Money Flow Index formula turns this data into a clean reading so you can see if buyers or sellers are more active. You don't need deep math for this. Just knowing that the Money Flow Index formula blends price and volume together already helps you read charts with more comfort.
How to Read the MFI Indicator
Learning to read the Money Flow Index (MFI) isn't rocket science, but it does take a little practice. Also, learning how to use the MFI indicator can make chart reading much easier and give you a better sense of the market's true strength. By checking trends, spotting volume changes, and observing when the indicator reaches high or low zones, you get a better feel for how to use MFI indicator? in real trading situations. Over time, practicing with different timeframes helps you understand indicators and signals more confidently, which is why how to use MFI indicator? is considered such a useful tool for many traders looking to improve their decisions. Since the MFI tells you about the strength of money flow (both price and volume), you want to look for a few key things on the chart.
1. Overbought/Oversold Zones
The MFI is an oscillator, meaning it moves between 0 and 100. The most common way people use it is to look at the extremes:
When the MFI hits 80 or higher: This is the Overbought Zone. It means a lot of money has flowed into the asset lately, and it might be "too expensive." This is often a sign that the price could start to fall soon. It's a possible sell signal.
When the MFI drops to 20 or lower: This is the Oversold Zone. It suggests that too much selling has happened, and the asset is maybe "too cheap." This can be a signal that the price might start to rise. It's a possible buy signal.
MFI is an effective tool for identifying overbought and oversold conditions. It is represented as a line that moves within a range of 0 to 100. When the MFI crosses above 80, it indicates overbought conditions. If the MFI falls below 20, it signals oversold conditions. The basic logic is that in overbought conditions, prices are likely to fall, so we would place a Sell order. In oversold conditions, prices are likely to rise, so we would enter a Buy order. You can see this in the example chart of the US Dollar/Singapore Dollar below:
 |
| Overbought & Oversold Trading with MFI on the USD/SGD |
However, it may not be effective when a strong trend is apparent in the market or for determining long-term trends. During such times, overbought and oversold signals may not always work correctly. For this reason, we do not use the MFI indicator alone. We usually use it in conjunction with other technical indicators that measure trend strength.
2. The Center Line (The 50 Level)
The line right in the middle, the 50 level, is important for seeing the overall direction.
- If the MFI is mostly above 50, it means positive money flow is in control. Buyers are generally stronger than sellers.
- If the MFI is mostly below 50, it means negative money flow is in control. Sellers are generally stronger than buyers.
Remember, don't use the MFI all by itself. Always check other indicators and the price chart to confirm what the MFI is telling you!
3. The Biggest Signal: Divergence
This is often the most powerful signal the MFI gives you. A divergence is when the MFI and the price chart start to disagree.
Bearish Divergence (Sell Warning): Imagine the assets price keeps going up and makes a higher peak (a new high). But look at the MFI, and it makes a lower peak. This is a big red flag! It tells you the price went up, but the amount of money supporting that move is actually getting weaker. A possible reversal down is coming.
Bullish Divergence (Buy Warning): The assets price makes a lower bottom (a new low). But the MFI makes a higher bottom. This is good news! It means the selling is running out of steam, and the money flow is quietly improving, suggesting the price might bounce up soon.
 |
| Divergence Trading with MFI on the USD/CNH |
Like other oscillators, you can also trade with divergences
in the Money Flow Index (MFI). If you encounter a negative divergence between
the oscillator and the price, you would enter a Sell order. If you come across
a positive divergence, you would enter a Buy order. You can see a clear example
of this in the chart of the US Dollar/Chinese Yuan pair above. In addition to
these, you can trade with all types of divergences in the MFI indicator.
What is the Best Setting for MFI?
Most traders use the MFI indicator settings with a 14-period lookback. It is the default option in almost every charting platform, and it works well in many market types. When you keep the MFI indicator settings at 14, the tool reacts fast enough to show short-term moves but still filters out a lot of noise. Some traders try 20 or even 10, but the goal is the same: find a setup that fits your style. If you like calm charts, you can test a higher number. If you want quicker signals, try a smaller number. There is no magic setting, but starting with the standard MFI indicator settings usually makes things easier for most people.
When traders compare different tools, many of them try to figure out which one feels like the Best Money Flow indicator. Some users think the classic MFI already works well enough to be called the Best Money Flow indicator, especially because it reacts to both price and volume. Others mix it with simple volume filters and still see MFI as the Best Money Flow indicator for quick reading. In the end, the choice is personal, and testing it on your own chart is always the safest way.
❗ Note that. Financial markets are full of opportunities, but they also come with risks. To mitigate these risks, we use technical analysis tools. However, in some cases, technical analysis tools may be insufficient. To avoid this, it is often more effective to use indicators like the MFI in combination with other technical analysis tools rather than relying on them alone. Successful trading!