LEARN MONEY FLOW INDEX（MFI）IN 3 MINUTES – BLOCKCHAIN 101

Introduction

Capital flow is the foundation of all market actions. Both rising and falling trends require the support of capital volume. An upward trend is definitely driven by a large influx of capital to push up prices; conversely, a downward trend is inevitably completed under the effect of a large outflow of capital. Capturing the direction of capital is the most urgent need for traders!

Money Flow Index (MFI) is a technical analysis tool used to measure the strength of capital inflow and outflow in the market. This indicator is mainly based on the relationship between price and trading volume, helping investors identify overbought and oversold conditions in the market.

The MFI was first introduced by Gene Quong and Avrum Soudack in 1991. They detailed the calculation and application of the MFI indicator in their paper “Detecting Overbought and Oversold Conditions in the Stock Market.” The introduction of this indicator aims to provide a more comprehensive market analysis tool by combining price and trading volume information, helping investors better identify potential market turning points.

Since its introduction, MFI has become one of the commonly used indicators in the field of technical analysis, widely used in stock, futures, and cryptocurrency trading markets. Investors use MFI to assist their trading decisions, especially when looking for overbought and oversold signals and confirming trend reversals. However, like all technical indicators, MFI should be used in conjunction with other analysis methods and tools to gain a more comprehensive market insight.

Calculation Method of MFI Indicator

The calculation of MFI involves multiple steps, mainly based on the Typical Price and trading volume. Here is the basic calculation process of MFI:

1. Calculate the Typical Price:

TP= (High+Low+Close)/3​

2. Calculate the Raw Money Flow:

RMF=TP×Volume

3. Calculate the Positive and Negative Money Flow:

• Positive Money Flow: If the typical price of the day is higher than the typical price of the previous day, the positive flow is equal to the raw money flow; otherwise, it is zero.
• Negative Money Flow: If the typical price of the day is lower than the typical price of the previous day, the negative flow is equal to the absolute value of the raw money flow; otherwise, it is zero.

4. Calculate the Money Ratio:

MR= 14 day simple moving average of Negative Money Flow/14 day simple moving average of Positive Money Flow

5. Calculate MFI:

MFI=100− {100/（1+MR）}​

Judgment Method of MFI Indicator

SuperEx provides users with MFI charts, making it easier for users to make trading decisions. Let’s use the charts provided by SuperEx as an example:

1. Judgment of Overbought and Oversold:

MFI above 70: When MFI exceeds 70, the market is considered overbought, which may be a signal for a buying opportunity. However, this may also indicate that the market is strong, and investors should pay close attention to whether there will be adjustments.

MFI below 30: When MFI is below 30, the market is considered oversold, which may be a signal for a selling opportunity. But caution is also needed because the market may be weak, and further declines cannot be ruled out.

2. Generation of Buy and Sell Signals:

MFI line crossover from below: When the MFI line crosses above 70 or other set overbought thresholds from below, it may generate a buy signal, indicating that market buying pressure is increasing.

MFI line crossover from above: When the MFI line crosses below 30 or other set oversold thresholds from above, it may generate a sell signal, indicating that market selling pressure is increasing.

3. Early warning of trend turning points:

Divergence between MFI and price: May indicate that the market trend is about to change.

Money Flow Index (MFI) serves as a sharp tool for market insight, providing investors with a comprehensive and intuitive analysis method. However, any technical indicator should be used with caution. Investors should apply MFI in conjunction with their trading style and market conditions, use it flexibly, and always pay attention to market changes. MFI, like a beacon in the market, guides investors in the right direction, unlocking the mysteries of the market.