Money Flow Index or MFI is a day trading oscillator made by Avrum Soudack and Gene Quong. It is known to be very much like another technical indicator called Relative Strength Index also utilized in day trading. The difference between both has to be that money flow index makes use of both volume and value to measure the day trading market sentiment. Thus, it's been called by some day traders as volume-weighted Relative Strength Indicator. Even though a manual computation of money flow index isn't carried out by day traders at present due to technology, getting acquainted with its formula continues to be important to better understand its purpose in day trading.
So as to determine the money flow index, a day trader must find the typical price, money flow, positive and negative money flow values and the money flow ratio.
Typical price= (high + low + Closing price) divided by 3
Money Flow= Typical price + Volume
(+) money flow value= sum of all the positive money flow over a certain period of time
(-) money flow value= sum of all the negative money flow over a certain period of time
Money flow ratio= (+) money flow value divided by the (-) money flow value
The typical price is produced by getting the average of the high, low and closing rates. The sum of the typical price and volume will then present the day trader the money flow figure. Volume here refers back to the number of securities bought and sold at the chosen period of time. i.e. number of securities dealt with within a 15-day period. It is (+) money flow if in the next period, the typical price indicates an increase.
But in cases where it demonstrates the exact opposite, it is a (-) money flow. The money flow ratio makes use of these two numbers.
This is the final money flow index formula:
Money flow index = 100 – [100/ (1 + Money Ratio)]
The resulting Money flow index
value that climbs up above 50 is claimed to be a buy indication while less than it is a sell indication. To learn a little more about Money flow index interpretation, a day trader may check out day trading blogs
on the web.