Price typically follows
MFI and will eventually move in the same direction.
If
a stock trades up 1 cent on 100 shares, and the
next trade is down 1 cent on 10,000 shares, it
shows that large sellers are more aggressive,
and vice versa. Given that large-volume single
trades are more significant than smaller-share
trades, the Money Flow Index reflects this comparing
today's average price with yesterday's and weighs
the average price by volume. The volume of shares
traded on upward moves is added up and then the
volume of shares traded on downward moves is subtracted.
The cumulative total for the day of every trade's
volume is then plotted against a 0 - 100 scale.
MFI is usually calculated over a 14 day period.
The
Money Flow Index was developed by Laszlo Birinyi,
Jr. as a real-time variation on the On-Balance
Volume indicator. Instead of using each day as
a reference point (as OBV does), MFI analyzes
each trade. And instead of ignoring the price
or the amount that the market is up or down, MFI
weights each trade by price.
MFI
is based on Money Flow but the two are not
the same.
Interpretation
Money
flow analysis is a volume weighted relative strength
index. It is effective for both stock and company
selection because it gives a view of a market's
essential strength or weakness. Normally, MFI
shows the same trends as the price pattern; indicating
that, in an uptrend, money is flowing into the
market, and when prices fall, money is flowing
out of the market.
-
Since Price - MFI divergences can exist for
a fairly long period, other indicators should
be used as confirmation and to select entry
points
-
Different time spans should be considered;
often the longer the better.
Signals
- A divergence between
price and MFI often signals an imminent reversal
of the trend.
- Readings below
20 on the scale are considered oversold (bullish).
- Readings above
80 on the scale are considered overbought (bearish).
Also
see On-Balance Volume (OBV)
