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Money Flow Index

Money Flow Index (MFI) is the technical indicator, which indicates the rate at which money is invested into a security and then withdrawn from it.

When analyzing the money flow index one needs to take into consideration the following points:

• divergences between the indicator and price movement. If prices grow while MFI falls (or vice versa), there is a great probability of a price turn
• Money Flow Index value, which is over 80 or under 20, signals correspondingly of a potential peak or bottom of the market.

Divergences

Positive and negative divergences between the stock and the MFI can be used as buy and sell signals respectively, for they often indicate the imminent reversal of a trend. If the stock price is falling, but positive money flow tends to be greater than negative money flow, then there is more volume associated with daily price rises than with the price drops. This suggests a weak downtrend that threatens to reverse as money flowing into the security is "stronger" than money flowing out of it.

Overbought/Oversold

As with the RSI, the MFI can be used to determine if there is too much or too little volume associated with a security. A stock is considered "overbought" if the MFI indicator reaches 80 and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and below suggests a stock is "oversold".

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