Money Flow Index (MFI) Definition
The Money Flow Index (MFI) is a technical oscillator that uses price and volume data to identify overbought or oversold conditions in an asset’s price. Developed by Gene Quong and Avrum Soudack, MFI is often used in technical analysis of stocks, commodities, indices, or crypto assets as it can give traders insights into potential reversals in market trends.
Money Flow Index (MFI) Key Points
- MFI is a momentum indicator that combines price and volume data.
- It is used to identify overbought or oversold conditions in the market.
- The MFI values ranges from 0 to 100, with 20 and 80 often used as thresholds to identify oversold and overbought conditions respectively.
- It is crucial in cryptocurrency trading as it informs traders of potential market trend reversals.
What is the Money Flow Index (MFI)?
The MFI is a technical analysis tool that visualizes the flow of money into and out of an asset over a specified period. The MFI uses both price and volume data to measure buying and selling pressure.
Why is the Money Flow Index (MFI) Important?
MFI is important because it helps traders identify potential price reversals. The MFI does this by measuring the flow of money into and out of an asset. When an asset is considered overbought, it indicates a price drop in the near future, while an oversold asset suggests a price rise.
When is the Money Flow Index (MFI) Used?
The MFI is used during technical analysis of an asset’s market performance. Traders use it when deciding whether to buy or sell an asset. It is particularly useful during volatile market conditions as it reveals potential market trend reversals.
Who Uses the Money Flow Index (MFI)?
The MFI is used by traders and investors who utilize technical analysis in making trading decisions. This includes those who trade asset classes such as equities, commodities, indices, and cryptocurrencies.
How Does the Money Flow Index (MFI) Work?
MFI is calculated by accumulating positive and negative money flow values over a specified period, usually 14 days, then creating a money ratio. This ratio is normalized into an index form (0-100). If the MFI is above 80, it is considered overbought; if it’s below 20, it is oversold. Traders often use these areas as signals for buying and selling.
