Money flow index is thought of as among the essential tools in day trading; however it is often disregarded by some day traders. What these day traders probably do not know is the proven fact that using this indicator will give them an advantage when it comes to identifying the price momentum and course. Money flow index provides the day trader an idea of how rapid a security's cost can change and if it will carry on moving on the same course or change path soon after. Unlike almost every other indicator, this one gauges the market sentiment by making use of the security price and the number of shares bought and sold in a certain time frame. The significance of this indicator is best grasped by examining carefully the money flow index formula.
Money flow is the product of a security's typical rate and amount. The typical cost is the average of the high, low and closing prices of a security. The security volume is the number of securities being exchanged at a certain time. A day trader's money flow computation is different from that of an investor's since he only computes money flow for a shorter time frame most notably in a week or a couple of days. Postive and negative money flows are then converted to a ratio. It is then labeled money flow ratio.
Money flow ratio is helpful in identifying the money flow index as revealed in this formula: MFI= 100 - [100/ (1 + Money Ratio)]. To fully utilize the money flow index in day trading, a day trader ought to understand how to interpret the resulting numbers. The actual result could move from 0 to one hundred.