Learn How to Use the Money Flow Index

Think of money flow as an easy way to visualize the value of shares being traded on a given day. Basically, it is share price multiplied by trading volume.

Ford stock chart with Money Flow Index
Chart courtesy of Stockcharts.com

You've probably calculated it before and didn't realize it. It's like trying to figure out how much you spent on gas last month after realizing you've thrown away all your receipts.

You know you stopped for gas 6 times.

You have a ten gallon tank, but can never seem to use the last gallon not matter how long the warning light stays on. So you could say that fill up was about 9 gallons.

You know that the lowest price you paid was $3.20 (because it felt like Christmas), and the highest you price you paid was $4.00 (which definitely didn't feel like Christmas).

To estimate your "money flow" on gas, you take the average price paid ($3.60), multiplied by the amount of gas you bought (54 gallons) for an estimate of $194.

Exact? No. Close? Yes.

In the same way, money flow is an estimate of the amount of money that changes hands. We don't know the exact number of people who bought or sold, nor do we know the exact price. But we can make an educated guess.

Invest Safely Dollar Sign Callout

Safe Investing Tip:
When the talking heads mention money "flowing" into or out of a stock, this does not mean the same thing as "money flow". They're just describing enthusiasm for the stock.

What is Money Flow?

It is a technical indicator used to place a dollar value on trading over a given period of time, which gives investors and traders an estimate for the total value of shares traded.

The money flow index (MFI) is a momentum oscillator that shows changes in money flow over time. Technically, it is the money flow on days with rising prices verses the money flow on days with falling prices.

How is Money Flow Calculated?

As you probably guess based on the gas example, it is pretty easy to calculate.

  • Step 1 = Calculate the "typical" price
  • Step 2 = Calculate money flow

Step 1 - Typical Price
Typical price is the average of the high price, low price, and closing price.

Typical Price = (High Price + Low Price + Closing Price) / 3

Step 2 - Money Flow
Money flow is the typical price multiplied by the number of shares traded.

Money Flow = Typical Price * Trading Volume

If today's typical price is highers than yesterday's, then today has a positive money flow.

If today's typical price is lower than yesterday's, then today has a negative money flow.

How is the MFI Calculated?

Now things get a bit more complicated.

  • Step 3 = Calculate the money ratio
  • Step 4 = Calculate MFI

Step 3 - Money Ratio
The money ratio is the positive money flow divided by the negative money flow over a set time period.

Money Ratio = Total Positive Money Flow / Total Negative Money Flow

Step 4 - MFI
Back to the easy stuff. Now we take the money ratio and turn it into a number between 0 and 100.

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

How to Interpret the MFI

If the MFI has a value of 80 or higher, then the stock is considered overbought.

If the MFI has a value of 20 or less, then the stock is considered oversold.

You can also look for differences between the MFI and price changes.

For example, if the price of a stock hits a new high, but the MFI is low or declining, this could tell you that there is not a lot of money behind this latest price increase (a weak rally attempt), and the stock could fall in price in the near future.