What is Money Flow Index (MFI)?
The Monetary Flow Index (MFI) is a technical analysis indicator used to assess buying and selling pressure in a financial market. It was developed by Gene Quong and Avrum Soudack, and it is based on the relationship between money flow and price changes. The MFI is used to identify overbought and oversold conditions in a market, and to generate buy and sell signals.
The MFI is calculated using both price and volume data. First, the typical price of a security is determined by adding its high, low, and close prices and dividing by three. Next, the money flow of a security is calculated as the typical price multiplied by the volume traded. Money flow is then used to create a ratio between the positive and negative money flow, which is then smoothed using an exponential moving average.
A high MFI reading indicates that there is a lot of buying pressure in the market, and that prices are likely to continue to rise. Conversely, a low MFI reading indicates that there is a lot of selling pressure in the market, and that prices are likely to continue to fall.
The MFI can be used in conjunction with other technical analysis indicators, such as moving averages and support and resistance levels, to generate more reliable buy and sell signals. For example, a bullish signal may be generated when the MFI rises above a certain level and the price is above its moving average, while a bearish signal may be generated when the MFI falls below a certain level and the price is below its moving average.
Simplified Example
The Monetary Flow Index (MFI) is like a map that shows how much money is flowing into and out of a market, like a store. If a lot of people are buying things at the store, it means there is a lot of money flowing in and the store is getting more and more crowded. This is like a high MFI reading. On the other hand, if a lot of people are leaving the store without buying anything, it means there is less money flowing in and the store is getting less and less crowded. This is like a low MFI reading.
By using this map, we can see when a lot of people are buying things and when they're not. If a lot of people are buying, it means the store is getting really popular and things might start to get more expensive. This is like when the MFI is high and prices are likely to go up. If not many people are buying, it means the store isn't as popular and things might start to get cheaper. This is like when the MFI is low and prices are likely to go down.
Just like a map, the MFI helps us understand what's happening in the market and what might happen next. But just like with a map, we need to use other information too to make sure we're making the right decisions.
History of the Term "Monetary Flow Index (MFI)"
Imagine a bustling marketplace of trading charts and technical indicators, where Gene Quong, a seasoned trader, and Avrum Soudack, a skilled programmer, met and their ideas collided.
Quong, frustrated by the limitations of existing tools like the Relative Strength Index (RSI), dreamt of a metric that captured not just price movements but also the underlying "muscle" of the market – the volume of buying and selling. Soudack, his coding fingers itching for a challenge, listened intently.
Days blurred into nights as they brainstormed. They visualized money flowing like a river, its volume surging with buying pressure and receding with selling, its color changing with market sentiment. They translated their vision into algorithms, lines of code morphing into the MFI formula.