# Money Flow Index (MFI): Definition and Uses

![Money Flow Index](https://www.investopedia.com/thmb/jkGu31_XuJXUjSyoYjrwufPQVbQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/mfi-resized-4edd7b3e094a43e989002d4740d245b2.jpg)

*— Investopedia / Ellen Lindner*

> **Definition**
>
> The money flow index measures the flow of money into and out of an asset by analyzing both price movements and trading volume. Using a scale of 0 to 100, it helps traders identify potential reversals when readings reach extreme levels or diverge from price action. 

If an apt phrase in everyday life is that money talks, then in financial markets, it screams. While many traders focus only on price, following the money can reveal hidden market shifts that price charts alone might miss.

That's where the money flow index (MFI) comes in, tracking not just what prices do, but how much investor conviction—how much money—stands behind those moves. For example, as prices rise with increasing volume, MFI can confirm that there's genuine buying pressure. But if prices are rising while the MFI fails to follow suit, that can be a warning that the rally is on shaky ground.

When readings climb above 80, that suggests the market might be overheating, or overbought, with too many buyers pushing prices to unsustainable levels, often a signal that sellers may step in to take profits. When readings drop below 20, that indicates the market might be oversold, like a stretched rubber band ready to snap back—potentially a good time for bargain hunters to start looking for deals. We take you through the strategies and calculations for using the MFI below.

### Key Takeaways

*   The money flow index (MFI) uses price changes and trading volume to create a fuller picture of market sentiment than price-only indicators.
*   When MFI readings reach extremes—above 80 or below 20—this can signal market shifts and thus trading opportunities.
*   Divergence between price action and the MFI can serve as an early warning sign of a trend reversal.
*   Traders can use MFI to help time their trades once trends are established, watching for dips below 40 in uptrends or rallies above 60 in downtrends for entry and exit points.

## What Is the Money Flow Index?

![Image](https://www.investopedia.com/thmb/gMd71FjuW5WMZcCXVy4BcCK_Y0Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Money-Flow-Index-MFI-Definition-and-Uses-June-2021-01-71fe69f798dd43e9b72c3d57b77142d8.jpg)

*— Image by Sabrina Jiang © Investopedia 2021*

Unlike more intimidating financial formulas, the MFI calculation follows a logical sequence that's pretty straightforward. Here's how it works in everyday terms:

1.  We find the "typical price" for each trading period by averaging the high, low, and [closing prices](https://www.investopedia.com/terms/c/closingprice.asp). This gives us a single price for that period.
2.  Next, we determine whether money is flowing in or out by comparing each period's typical price to the previous one. If price moved up, money is flowing in (positive); if price dropped, money is flowing out (negative).
3.  We then multiply each period's typical price by its trading volume to calculate "raw money flow," showing us how much money actually moved. The positive and negative money flows are tracked separately over 14 periods.
4.  We add all the positive money flows over the 14-period window and separately total all the negative money flows.
5.  Finally, we calculate the money flow ratio (fitting a 0 to 100 scale) by dividing the sum of positive money flows by the sum of negative money flows.
7.  As each new period ends, we recalculate the MFI using the most recent 14 periods of data.

This combination of price moves and volume provides a fuller picture of sentiment in the market than either factor could provide alone. When significant volume accompanies price moves, MFI gives those moves more weight, reflecting real-world trading where conviction matters as much as direction.

### Calculating the MFI

More precisely, here are the formulas behind the MFI:  

$\begin{aligned} &\text{Money Flow Index}=100-\frac{100}{1+\text{Money Flow Ratio}}\\ &\textbf{where:}\\ &\text{Money Flow Ratio}=\frac{\text{14 Period Positive Money Flow}}{\text{14 Period Negative Money Flow}}\\ &\text{Raw Money Flow}=\text{Typical Price * Volume}\\ &\text{Typical Price}=\frac{\text{High + Low + Close}}{3}\\ \end{aligned}$

When price moves higher from one period to the next, raw money flow is considered positive and gets added to the positive money flow total. Meanwhile, when prices are dropping, that period's raw money flow is negative and gets added to the negative money flow bucket. This separation helps track whether money is predominantly flowing into or out of an asset over the measurement period.

> **Tip**
>
> The MFI really shows off its usefulness when it diverges from price action, perhaps giving you a heads-up on reversals before they become obvious to everyone else in the price charts.

## How To Interpret the MFI's Signals

The most helpful MFI signals come from [divergence](https://www.investopedia.com/terms/d/divergence.asp)—when price and money flow move in opposite directions, often foreshadowing reversals before most traders spot them. Suppose a stock is climbing to new highs while the MFI fails to match its previous peak. This divergence suggests that despite rising prices, buyer enthusiasm is waning—institutional investors might be quietly distributing shares while retail investors continue buying. When this happens, those using the MFI prepare for a potential decline in the stock price.

The opposite scenario is equally helpful. When prices hit lower lows, but the MFI is at higher lows, this could indicate that selling pressure is tiring out while accumulation starts up beneath the surface. This positive divergence often precedes [bullish reversals](https://www.investopedia.com/articles/trading/04/012804.asp) that can catch bearish traders off guard.

Beyond divergences, extreme MFI readings can act as your early warning system. While a reading above 80 signals overbought and a reading below 20 signals undersold, momentum can often keep price going even with readings at those levels.

On the other hand, readings above 90 signal exceptional buying pressure that's rarely sustainable, creating prospects for [contrarian traders](https://www.investopedia.com/terms/c/contrarian.asp) looking to sell into strength. Meanwhile, readings under 10 could indicate panic selling, which means you have a pickup prospect while others are fleeing.

The MFI can also help identify when pullbacks within larger trends might be ending. During uptrends, MFI dips to the 40 range might offer solid entry points. Likewise, during a downtrend, [relief rallies](https://www.investopedia.com/terms/r/relief-rally.asp) that push the MFI to around 60 could present a good prospect for short selling. Some traders will wait for an MFI reversal at both of those levels.

## MFI vs. RSI: What's the Difference?

The MFI and Relative Strength Index ([RSI](https://www.investopedia.com/terms/r/rsi.asp)) are quite similar: both are oscillators with scales of 0 to 100, are used to identify potentially overbought and oversold conditions, and are perhaps most useful when showing divergence with price.

However, they measure different things. The RSI tracks only price momentum, calculating the speed and magnitude of directional price movements. The MFI incorporates volume as a weighting mechanism, thus measuring the force behind the price changes.

This aspect gives MFI particular value in confirming the strength of trends. When price and volume move in harmony—both rising or both falling—the MFI can generate stronger signals than the RSI, which can miss the increasing participation behind certain price moves.

There are also differences in timing. Because volume often leads price, the MFI often signals potential reversals earlier than the RSI. This can give you valuable time to prepare your trades before major moves appear on the price charts or trigger RSI signals.

Neither indicator always outperforms the other across all market conditions. In trending markets with steady participation, they often move in tandem. But during crucial transition periods—when major investors are quietly accumulating or distributing and the trend shift isn't yet obvious, the MFI's volume sensitivity can be invaluable.

> **Warning**
>
> The MFI can generate false signals, particularly when trends are strong or overbought or oversold conditions persist longer than expected. What seems like an imminent reversal might simply be a pause before the trend continues with even greater strength. Traders who automatically sell when the MFI goes above 80 or buy when it drops below 20 might find themselves exiting profitable positions too early.

## The Bottom Line

The MFI offers traders a way to test how much conviction stands behind the moves seen on price charts. By combining price action with trading volume, MFI helps identify potential reversals through extreme readings and divergences that price-only indicators might miss. However, like any technical tool, it works best when combined with other forms of analysis.

> **Article Sources**
>
> 1.  Mohsen Ghobadi. "[Profitability of Technical Analysis Indicators to Earn Abnormal Returns in International Exchange Markets.](https://www.pressacademia.org/archives/jefa/v1/i4/9.pdf)" _Journal of Economics, Finance, and Accounting_, vol. 1, no. 4 (2014). 
>     
> 2.  P. J. Kaufman. "[Trading Systems and Methods](https://www.wiley.com/en-sg/Trading+Systems+and+Methods%2C+6th+Edition-p-9781119605355)," Pages 345-353. John Wiley & Sons, 2019, sixth edition.
>     
> 3.  Accounting Insights. "[RSI vs MFI](https://accountinginsights.org/rsi-vs-mfi-key-differences-and-how-they-impact-your-trading-strategy/)."