Money Flow Index (MFI) – Signals, Formula & Strategy

What Is the Money Flow Index

The money flow index (MFI) is a momentum oscillator that uses both price and volume to spot overbought or oversold conditions. It ranges from 0 to 100 and helps traders identify possible reversals by showing how much money flows in or out of an asset.

High readings suggest strong buying pressure; low ones point to selling pressure. Its real value comes from how traders use it alongside market context.

Why Traders Use the MFI

The money flow index is popular among traders who want to:

• Spot early signs of trend exhaustion or reversal

• Confirm momentum behind price breakouts

• Identify hidden shifts in buying or selling interest

• Combine volume data with price action for better timing
   

Many consider the MFI a leading indicator, as it can often show subtle shifts before the price reacts. That’s especially helpful when confirming chart patterns, analyzing divergences, or validating signals from other tools.

MFI vs RSI

The money flow index and the relative strength index (RSI) are both momentum indicators, but they work in slightly different ways.

The RSI looks only at price changes to measure buying and selling momentum. It tells you when a market might be overbought or oversold based on recent price movements. Simple and effective, but it ignores one thing: volume.

The MFI, on the other hand, includes volume data in the calculation. That’s why it’s often called the volume-weighted RSI. This added layer helps traders see not just how far price has moved, but how much money backed that move.

Many traders use both together to confirm a signal. For example, if both indicators show overbought levels, that may suggest a stronger case for a pullback.

How to Calculate the Money Flow Index

Understanding how to calculate the money flow index helps you see what’s going on behind the chart. Don’t worry, it’s easier than it looks. The process has four steps, and you’ll need both price and volume data to get started.

Typical Price Formula

The first step is to perform the typical price calculation, which gives a basic average of how the asset traded during the period.

Formula:

Typical Price = (High + Low + Close) ÷ 3

This is the price level we’ll use in the rest of the MFI calculation.

Raw Money Flow Calculation

Multiply the typical price by volume to get the raw money flow.

Formula:
Raw Money Flow = Typical Price × Volume

Positive and Negative Money Flow

Now you classify each period as part of the positive and negative money flow by checking whether the typical price increased or decreased compared to the previous day.
 

• If today's typical price is higher, it’s positive money flow.

• If it’s lower, it’s negative money flow.
   

Then:

• Add up all the positive money flow values over a 14-period window.

• Do the same for the negative money flow.
   

This 14-period default is what most money flow index indicators use, but it can be adjusted (we’ll cover that later).

Money Ratio and MFI Formula

Now calculate the money ratio formula, which is simply:

Money Ratio = Positive Money Flow ÷ Negative Money Flow

Finally, you get the money flow index value itself:

MFI = 100 − (100 ÷ (1 + Money Ratio))

The result will be a number between 0 and 100, which traders use to spot overbought and oversold signals, divergences, and shifts in market momentum.

How to Read MFI Signals

The money flow index doesn’t just move up and down, it sends signals traders can use to spot potential entry and exit points. These signals are based on how the MFI reacts to price movements and volume shifts over time.

Let’s break down the three most common and practical signal types:

Overbought and Oversold Levels

When the MFI moves above 80, the asset is considered overbought, meaning a price correction might be near. When it drops below 20, it signals oversold conditions, which may point to a possible price bounce.

These overbought/oversold thresholds help identify potential turning points, especially in ranging markets. However, in strong trends, the MFI can remain overbought or oversold for extended periods.

Key points:

• MFI > 80 - Overbought (watch for downward reversal)

• MFI < 20 - Oversold (watch for upward reversal)

• In strong trends, consider adjusting thresholds to 90/10
   

Bullish and Bearish Divergences

A divergence occurs when price moves in one direction, but the MFI moves in the opposite. This can suggest a weakening trend and a potential reversal.

Types of divergences (Bullish & Bearish Divergence):
 

• Bullish Divergence: Price makes a new low, but the MFI forms a higher low → buying pressure may be increasing

• Bearish Divergence: Price reaches a new high, but the MFI makes a lower high → selling pressure may be building
   

These trading signal divergences are stronger when they appear near extreme MFI levels (above 80 or below 20).

Failure Swings

Failure swings in MFI are reversal patterns formed entirely by the money flow index itself, independent of price action.

Bullish failure swing:

1. MFI drops below 20 (oversold)

2. Bounces above 2

3. Pulls back but stays above 20

4. Breaks above the previous high
    

Bearish failure swing:

1. MFI rises above 80 (overbought)

2. Falls below 80

3. Rebounds slightly but stays below 80

4. Drops below the previous low
    

Why the MFI Matters

The money flow index isn’t just another oscillator. What makes it stand out is its unique combination of price and volume, giving it an edge over other momentum tools like the RSI.

Volume-Weighted Advantage

Unlike the relative strength index, which only looks at price changes, the MFI adds volume into the equation. This makes it a volume-weighted momentum oscillator, similar to On-Balance Volume (OBV), though each calculates volume differently, providing a more complete view of buying and selling pressure.

Why does this matter?

• Volume helps confirm whether a price move has real conviction

• MFI can detect false breakouts or weak trends early

• It often gives earlier reversal signals than non-volume-based indicators
   

Trend and Momentum Confirmation

The money flow index can also serve as one of the most effective trend confirmation indicators, especially when used with price action and volume.

When the MFI is rising in line with price, it confirms strong buying momentum. When both fall together, it signals solid selling pressure.

Use it to:

• Confirm breakouts or breakdowns

• Filter out weak trend signals

• Avoid entering trades against the dominant momentum
   

If price action and MFI disagree (e.g., price makes new highs, but MFI doesn’t), that could be a warning sign that the trend is losing steam.

MFI Trading Strategies

Use the money flow index to build structured strategies that combine volume, price action, and momentum signals. These are some of the most effective ways to apply MFI in real markets:

Combine with Support and Resistance

• Look for overbought readings (MFI above 80) near resistance zones: This may signal a potential reversal

• Watch for oversold readings (MFI below 20) near strong support: Often a sign of a possible bounce

• Confirm with candlestick patterns or price rejection at key levels. This approach works well when trading break and retest setups where structure aligns with volume confirmation.
   

Use Divergences for Reversals

• Bullish Divergence: price makes lower lows, but MFI forms higher lows means buying pressure is increasing

• Bearish Divergence: price hits higher highs, but MFI makes lower highs means potential momentum loss

These signals are stronger when combined with overbought/oversold levels or confirmed using bullish and bearish divergence patterns in price action.

 

Set Entry and Stop-Loss Points

• Enter after MFI exits an extreme zone and price confirms the new direction
• Place stop-losses beyond recent swing highs/lows or nearby support/resistance levels
• Set profit targets based on opposing MFI zones or previous price structure

Pair with RSI, Moving Averages, or ADX

• Combine MFI with RSI to strengthen overbought/oversold or divergence signals

• Use moving averages to identify trend direction and validate MFI-based entries

• Apply ADX to confirm whether the market has enough trend strength to act

Best Settings for MFI

The default MFI setting is 14 periods, offering a good balance for most traders. Shorter settings (7 or 10) give quicker signals, ideal for fast markets like crypto, while longer ones (21 or 28) reduce noise. In strong trends, some traders also adjust the overbought/oversold levels from 80/20 to 90/10 to avoid false signals.

Pros and Cons of the MFI

Like any technical analysis tool, the money flow index has both strengths and limitations. Understanding these can help you decide when and how to use it effectively in your trading routine.

Key Advantages

The money flow index combines price and volume to give a clearer view of market sentiment. This volume-based approach can spot shifts in buying or selling pressure earlier than price-only tools like the RSI, especially when divergences appear between MFI and price.

Limitations to Watch Out For

Despite its strengths, the money flow index can give false signals, especially during strong trends where it may stay overbought or oversold for a long time. Divergences don’t always result in reversals, so it’s best to use MFI alongside other indicators and a solid risk plan.

MFI in Real Markets

Divergence in Price and MFI Charts

One of the most practical applications of the money flow index is spotting divergences between MFI and price. For example, if the price of a cryptocurrency like Bitcoin is making new highs but the MFI is falling, that could suggest buying momentum is weakening, signaling a possible pullback.

In contrast, if the price is declining but the MFI starts forming higher lows, it could indicate that selling pressure is easing, potentially leading to a bullish reversal.

Trade Examples with Entry and Exit

Let’s say you’re analyzing EUR/USD on a 4-hour chart. The pair forms a new low, but the MFI shows a higher low, classic bullish divergence. You could interpret this as a sign to look for long entries, especially if price also reacts near a support level.

On the other hand, a stock like Apple might post a new high, while the MFI forms a lower high (bearish divergence). That might prompt you to tighten stop-loss levels or prepare for a short-term correction.

Combining money flow index signals with chart patterns and other indicators like RSI or moving averages often leads to higher-probability trades.

Conclusion

The money flow index is a powerful technical analysis tool that blends price action with volume to offer traders valuable insights. From identifying overbought and oversold conditions to spotting divergences and confirming trend strength, the MFI can be a key part of any strategy.

While no indicator is perfect, using the money flow index alongside other tools, such as support/resistance, RSI, or ADX, can help refine your entries, exits, and risk controls. With proper settings and a bit of practice, the MFI becomes much more than just a number on the chart, it becomes a strategic advantage.