How is the MFI used to assess the flow of money in a stock?
How is the MFI used to assess the flow of money in a stock?
1 answer
@ena.rippin
The Money Flow Index (MFI) is a technical indicator used to assess the flow of money in a stock by measuring both the price and volume of the stock over a specific period. The MFI combines price and volume data to generate a value that indicates the strength of money flowing in or out of the stock.
The MFI is calculated in four steps:
- Typical Price: The typical price for a specific period is calculated by adding the high, low, and closing prices of the stock and dividing the sum by 3.
- Raw Money Flow: The raw money flow is calculated by multiplying the typical price by the volume for a specific period.
- Positive Money Flow and Negative Money Flow: The positive money flow is calculated by summing up the raw money flow for all periods where the typical price is higher than the previous period's typical price. The negative money flow is calculated by summing up the raw money flow for all periods where the typical price is lower than the previous period's typical price.
- Money Flow Ratio and Money Flow Index: The money flow ratio is calculated by dividing the positive money flow by the negative money flow. The money flow index is then derived from the money flow ratio by applying the formula: MFI = 100 - (100 / (1 + money flow ratio)).
The MFI ranges from 0 to 100, where values above 80 indicate overbought conditions and potential selling opportunities, while values below 20 indicate oversold conditions and potential buying opportunities. Traders and investors use the MFI to identify potential trend reversals, confirm price trends, and generate buy or sell signals.
If the MFI is rising while the stock price is also rising, it suggests strong buying pressure. Conversely, if the MFI is falling while the stock price is rising, it indicates weakening buying pressure and potential selling opportunities.