Money Flow

Finally, the last technical indicator that we will learn in this section is the 'Money Flow Index.'

What does "money flow" mean in stock trading?

Price and volume are essential indicators in technical analysis for predicting the price movement.

For tracking the price and volume data, you may use the Money Flow Index (MFI).

MFI identifies the momentum of outflow and inflow of money of a stock over a specific period of time and is one of the popular technical tools.

Trading, strategy using Money Flow Index

MFI is a momentum oscillator which identifies the momentum of outflow and inflow of money of a stock over a given time period.

It is also known as a volume-weighted version of RSI however the main difference in MFI is with regards to volume

Calculation

The Money Flow Index (MFI) calculation involves the following steps-

1. Typical Price = (High + Low + Close)/3
2. Raw Money Flow = Typical Price x Volume
3. Money Flow Ratio = (14-period Positive Money Flow) / (14-period Negative Money Flow)
4. Money Flow Index = 100 – {100 / (1 + Money Flow Ratio)}

MFI interpretation

MFI is a volume-weighted version of RSI as it is interpreted similarly to RSI oscillator; however the difference in MFI is with regards to volume. Due to the volume feature, MFI works little differently than that of RSI.

By computing the indexed value depending on the number of bars (as specified in the money flow index setting), a line is plotted on the chart which oscillates between 0 and 100 levels.

With the rise in stock price, the MFI also goes up which signals increasing buying pressure.

On the other hand, MFI goes down with a decrease in price thus signaling decreasing buying pressure.

Therefore you may predict the directional movement of the market simply by analyzing MFI.

Strategies using MFI:

Case 1: When price cuts above 20 SMA from below and simultaneously MFI also cuts above the 40 line, it generates a buy signal.
Case 2: Similarly, when the price cuts below 20 SMA from above and MFI also cuts below the 60 line, it generates a sell signal.

Like other technical indicators, MFI should also be used in conjunction with other technical analysis tools like chart patterns, volume and price breakouts to get confirmed signals produced by MFI.

Conclusion

So, now that we are at the end of this module. We have learned quite a few popular technical indicators used by market experts globally. But as the learning comes to an end, it is time to practice them well. In technical analysis, only practice can bring significant results in trading. So keep on practicing and keep learning about technical analysis from the several modules that we have prepared for ELM School.