What is the MFI Indicator?

Last Updated on August 13, 2021 by Mark Ursell

What is the MFI indicator? and why you should be using it. Video article demonstrating the powerful Money Flow Index (MFI) Indicator.

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Read the Video Transcript

this is Mark from Tradinformed.com and welcome to this video on the money flow

index or MFI indicator as the name suggests the money flow index uses

volume as part of the calculation now this makes the obvious step that price

moves that are based on larger volume have got more participants and so are

more significant so the MFI it looks something if we look

at the calculations it looks something like the RSI indicator which is very

popular but I think the MFI deserves to be just as popular if not more so

because it is taking into account the amount of participation in the move on

the screen you can see the SPY SPDR etf here between 2018-2019 going into

2020 and along the bottom is volume now it’s pretty easy to see this is not a

huge sample size but it is pretty easy to see that the majority of these bars

are Green, which is not surprising because the market has risen during this

period, however, it is equally fairly obvious to see that a large proportion

of the red bars this is the volume that has occurred on a down day a large

proportion of the tall bars rather are red even with this relatively small

sample we can see there is a bit of an imbalance the market that has tended to

go up but has large bars tending to be red and this is a pattern that I expect

you can see throughout most periods of history in the panicky moments when we

are selling off tend to have the largest volume okay so this is giving us a clue

that volume is at least some significance that is not displayed in

any technical indicator that only includes price now if we add the money

flow index the MFI to the chart we can see how we can see

firstly how it looks it looks similar to RSI it looks similar to the stochastic

oscillator etc however we can see that where we have high volume we have an

exaggeration in the indicator we have the normal overbought and oversold areas

that I’m going to talk about more later when I talk about the MFI trading

strategy now in this spreadsheet I have the calculations for the MFI and the

reason that I’m showing you this is because I believe that if you want to

use a technical indicator you should understand how it is calculated what

numbers what data it uses in the calculation so firstly we start off with

the typical price this is just the average price and you can see I put the

formula there the high price the low price and the close price divided by

three so it’s an average of these three prices we multiply that by volume to get

the money flow and then if we have a positive value getting used to the RSI

calculation this is very similar if we have a positive close in other words

that close is higher than the previous we record the value in this column if we

have a lower close a negative close the value is recorded in this

column we divide one by the other over the number of periods that we want to

use so I’m using 14 periods and then we use the formula to make it into the

oscillator that we know that is bounded between 0 and 100 now if you want

to calculate this yourself it’s very easy to do so you can either use this

principle here or there is a link on the screen if you want to download this

spreadsheet or a spreadsheet containing the MFI for free just subscribe to

tradinformed.com there’s also a link below this video if you want to do that in

this video we’ve looked at the MFI we’ve looked at what does it look like we’ve

looked at why I think it is useful and why every

technical trader should know about this indicator and maybe even use it and

we’ve looked at how you can calculate it but the key question is is it any use as

part of a trading strategy and that question is going to be answered in the

next video in this series so please click on the link and check out that

video and if you want more information about trading the financial markets in

particular about how to back test your trading strategies to get the trading

results that you deserve please go to

www.tradinformed.com

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