Money flow index (Ofer Abarbanel online library)

The money flow index (MFI) is an oscillator that ranges from 0 to 100. It is used to show the money flow (an approximation of the dollar value of a day’s trading) over several days.

Uses

MFI is used to measure the “enthusiasm” of the market. In other words, the money flow index shows how much a stock was traded.

A value of 80 or more is generally considered overbought, a value of 20 or less oversold. Divergences between MFI and price action are also considered significant, for instance if price makes a new rally high but the MFI high is less than its previous high then that may indicate a weak advance that is likely to reverse.

MFI is constructed in a similar fashion to the relative strength index (RSI). Both look at up days against total up and down days, but the scale, i.e. what is accumulated on those days, is volume (or dollar volume approximation rather) for the MFI, as opposed to price change amounts for the RSI.

Marek and Čadková (2020)[1] studied different settings of MFI parameters. The testing was randomised in time and companies (e.g., Apple, Exxon Mobile, IBM, Microsoft) and showed that MFI can beat simple buy-and-hold strategy; therefore, it can be useful for trading. They showed that settings of MFI which are usually recommended in the literature offers no advantage for trading and it is necessary to optimize settings for each single stock.

References

  1. ^Marek, Patrice; Čadková, Věra (2020). “Optimization and Testing of Money Flow Index”. APLIMAT 2020 – 19th Conference on Applied Mathematics.

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Ofer Abarbanel online library

Ofer Abarbanel online library

Ofer Abarbanel online library