The Money Flow Index is another momentum indicator illustrating the strength of money flowing into and out of a security. While related to the Relative Strength Index, the Money Flow Index accounts for volume while the RSI only incorporates pricing information.
The calculation of the Money Flow Index requires multiple steps. First, determine the period's Typical Price:
Typical price = (High + Low + Close) / 3
Calculate Money Flow (not the Money Flow Index) by multiplying the period's Typical Price by the volume:
Money Flow = (Typical Price) * (Volume)
If today's Typical Price is greater than yesterday's Typical Price, it is considered Positive Money Flow. If today's price is less, it is considered Negative Money Flow. Positive Money Flow is the sum of the Positive Money over the specified number of periods. Negative Money Flow is the sum of the Negative Money over the specified number of periods.
Money Ratio = Positive Money Flow / Negative Money Flow
Money Flow Index = 100 - [100/(1+Money Ratio)]
Use the Money Flow Index to look for divergence between the indicator and the price action. If the price trends higher and the MFI trends lower (or vice versa), a reversal may be imminent.
Look for market tops to occur when the MFI > 80. Look for bottoms to when the MFI < 20.