All you wanted to know about the Money Flow Index in technical analysis

Money Flow Index (MFI) is a technical oscillator that identifies the overbought and oversold condition by using price and volume data. Unlike the Relative Strength Index (RSI), which uses only price to determine the condition, MFI takes advantage of both price and volume to deeply understand the overall scenario. The indicator moves in the range of 0-100 value.

The two significant components while analysing a security are the stock price and volumes. Both the components are included in MFI, and hence, the strategies built on these components provide higher degree of confirmation probability.

Given that the indicator has a combination of price and volumes, many experts acknowledge this analysis as the volume-weighted RSI.

In this indicator, the overbought condition is classified at over 80 values and oversold as under 20 values. An analysis of asset crossing 90 values can also provide relevant information of the trend in MFI. Similarly, this indicator also sheds a light on the divergence. A situation exhibiting a price fall and MFI indicator showing an upside rally suggests the price is about to build a bullish sentiment with price about to scale higher.

Signals of Money Flow Index

-- When the MFI falls below 80 value from the overbought condition and the price still manages to escalate higher, the signal shows that the price is likely to top out in coming sessions.

-- Likewise, when the MFI rises above the oversold condition of 20 value with price showing less positivity, the indication shows that the future sessions are likely to see a sharp surge in price.

-- The moves above 90 and below 10 are very rare. That said, any move above 90 is an opportunity for shorting trade, while MFI below 10 value reflects an opportunity for a long trade.

-- When a security shows a long body with increased volumes, the MFI may show a positive breakout.

-- Unless a firm rally of MFI does not occur, the trend may not be considered as a confirmed trend.

How to use the index

The indicator provides an in-depth analysis of price and volumes, together. There are instances when the strength in the price may not show significant improvement, but it still manages to reflect a positive upside. Such signals can be identified by studying the MFI indicator.

The MFI study on the daily and weekly chart assists in identifying short-term trade for quick gains. A stock building positive sentiment on the price action and volume provides varied opportunities for quick gains. The various MFI strategies provide cushion for such occasions.

An alternate way this indicator helps in identifying successful trades is in conjunction with other price-based indicators. The moving averages, price patterns, candlestick patterns, and various theories like Gap down, gap up, Bollinger Band, Parabolic SAR in combination with MFI can deliver signals possessing higher probability of confirmation. (Chart of Aarti Industries Limited)