Money Flow Index

A stock may rally for a short time until momentum drops. Traders start to take money out. We don’t want to keep holding or attempt a buy in a rally about to end. One additional indicator to help decision making is the Money Flow Index - MFI indicator. It tracks money flowing into and out of a stock.

MFI considers both price and volume to determine the "money flow" for each period. The indicator is also known as a volume-weighted Relative Strength Index (RSI). It is particularly useful for trading penny stocks, those low-priced shares under $5.

Money Flow Index Calculation

1. Typical Price (TP)

For each period (day, hour, etc.), calculate the typical price

TP = (High + Low + Close) / 3.

2. Raw Money Flow

Multiply the typical price (TP) by the volume for that period.

Raw Money Flow = TP * Volume.

3. Positive and Negative Money Flow

Determine if the current period's TP is higher or lower than the previous period's TP. If it's higher, the money flow is positive; if it's lower, it's negative.

Sum the positive money flows and the negative money flows separately over a chosen period (typically 14 periods).

4. Money Ratio

Calculate the ratio of the positive money flow to the negative money flow.

Money Ratio = Positive Money Flow / Negative Money Flow.

5. Money Flow Index (MFI)

MFI = 100 - (100 / (1 + Money Ratio))

It is useful as a signal of a change in the market sentiment and how much money is behind a move. Recently I have been observing the MFI, using it as additional confirmation for making any buy or sell decisions.

READING THE MONEY FLOW INDEX

📈📉 Gauging Sentiment

Sentiment signalled by the MFI reflects how much money is spent by traders and investors, not on the number of stocks bought and sold.

⚠️ Above 80 Market is overbought

An overbought signal is not an automatic sell or time to short signal. Sometimes price has a shallow pullback before heading higher again.

Pullbacks may be short or they may be long. Having other technical indicators on the chart helps us form a better overall analysis.

💡 Below 20 market is oversold

This may be a potential buy signal.

A more useful way of using the MFI is through observing the price on the chart vs the direction of the MFI indicator.

📈⬆️ Buying Pressure

· If price is rising and the MFI is rising strongly, it suggests strong buying pressure.

📉⬇️ Selling Pressure

· When price is falling and the MFI is falling, it suggests strong selling pressure.

CONFIRMING THE STRENGTH OF A TREND

Ease in Uptrend

There may be a pause in the uptrend when the MFI rises and price moves sideways.

Another scenario is where price is rising and the MFI is falling. It may signal a weakening of the uptrend and a possible reversal.

Ease in Downtrend

MFI indicator rises while the price moves sideways. Downward momentum is decreasing and easing.

Detecting Trend Reversals

· Bullish divergence - lower low in price and higher low on the MFI

· Bearish Divergence – higher high in price and lower high on the MFI

Better Entries and Exits

A good setup may be further confirmed by the MFI. It’s interesting to see how much money has been flowing into a stock.

This is a chart from a past trade on Antipa Minerals AZY. By placing the MFI onto the chart we notice the MFI bearish divergence where price had made a higher high while the MFI had made a lower high. Price fell from the point of divergence.

Following the pullback, price rejected off the long-term GMMA and showed early signs of turning back up. Long-term investors were supportive of the uptrend as the GMMA lines were well separated. Against the stable foundation of the long-term, the probability was high of a recovery and resumption of the uptrend.

Price broke through resistance at 0.49 and an entry was made on AZY.

🎯 Target Profit 0.60

❇️ Entry at 0.50 as marked by arrow

🛑 Stop Loss at ATR 0.40

At the time of opening this trade I had not considered the MFI. As part of a back testing exercise, I wanted to see the value of the MFI in providing extra information for better decision-making.

Had the MFI been used, an alternative entry point was possible at the same entry price as marked by 2. This was after the MFI indicator fell under 20 into the oversold area and price had hit the lower edge of the long-term GMMA. Price recovered after a bounce off the long-term GMMA while the MFI indicator also began to rise in the same direction.

If the MFI indicator was sitting in the over 80 overbought area, extra caution was needed before opening a position.

Back to the original entry, as marked by the purple arrow, price dipped but did not trigger the ATR stop loss, keeping us in the trade. Price recovered back upwards and the target profit was achieved as marked by the star. The AZY position was closed at 0.60 for a profit of 20%.

After the position was closed, there was a short pullback in price and the MFI indicator. Presumably some profit taking after a good run in such a short number of days. The MFI indicator was not above 80 in the overbought area so it was no surprise to see price resume the uptrend.

Price continued to rise with the MFI touching a little above 80 in the overbought area. As price rose to the high, the MFI declined. Higher prices were not sustainable as money flowed out of the stock. Price eventually followed the MFI downwards. Traders sold off as the short-term GMMA compressed and moved down.

The MFI provided valuable added information to the AZY chart.

There are multiple uses of the MFI indicator. Confirming better entries/exits, identifying buying/selling pressure, spotting trend reversals and being aware of overbought/oversold areas. The MFI reveals the sentiment of the money flow and is a useful confirmation to the trader/investor sentiment reflected in the GMMA.