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)
6.63
-0.54
