32. Money Flow Index (MFI)

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1. What is Money Flow Index (MFI)?

The Money Flow Index (MFI) is a volume-weighted momentum oscillator that measures buying and selling pressure. It uses both price and volume to identify overbought or oversold conditions and is often referred to as the volume-weighted RSI.

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2. Components of MFI?

• Typical Price (TP) = (High+Low+Close)/3(\text{High} + \text{Low} + \text{Close}) / 3

• Raw Money Flow = Typical Price × Volume

• Money Flow Ratio = (Positive Money Flow) / (Negative Money Flow)

• MFI Formula:

  MFI=100−(1001+Money Flow Ratio)MFI = 100 - \left( \frac{100}{1 + \text{Money Flow Ratio}} \right)

Default lookback period = 14 days

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3. Pros and Cons of MFI?

Pros:

• Incorporates volume, unlike RSI or other price-only oscillators.

• Useful for spotting divergence and early trend reversals.

• Indicates overbought (>80) and oversold (<20) zones.

Cons:

• Can produce false signals in strongly trending markets.

• Less responsive in low-volume environments.

• Interpretation may vary across different timeframes.

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4. What is the purpose of MFI in stock analysis?

• To detect buying and selling pressure using both price and volume.

• To identify potential reversal zones and divergence.

• To evaluate money flow strength into or out of an asset.

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5. How is MFI calculated or derived?

1. Calculate the Typical Price.

2. Multiply by volume to get Raw Money Flow.

3. Separate positive and negative flows based on TP changes.

4. Compute the Money Flow Ratio and apply the formula to get MFI.

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6. When should traders use MFI?

• In range-bound markets to time reversals.

• To confirm breakouts or breakdowns with volume.

• When looking for divergence between price and money flow.

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7. What are the limitations or risks of using MFI?

• Not effective in strong trends — can stay in overbought/oversold zones.

• Sensitive to sudden volume spikes.

• Can give late signals during fast-moving price action.

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8. What are common mistakes when interpreting MFI?

• Treating overbought/oversold zones as standalone signals.

• Ignoring volume anomalies that distort MFI readings.

• Not confirming with trend or momentum indicators.

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9. How can MFI be combined with other tools for better accuracy?

• Use with RSI or MACD to validate momentum.

• Combine with trendlines or support/resistance for entry setups.

• Pair with candlestick patterns or price action near key MFI zones.

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10. How do professional traders interpret MFI differently from beginners?

Professionals:

• Focus on divergence signals between MFI and price.

• Use MFI with volume confirmation and trend filters.

• Adapt the lookback period based on asset volatility and timeframe.

Beginners:

• Trade every MFI crossover of 20/80 without context.

• Ignore volume behavior or trend strength.

• Use MFI as a standalone signal instead of part of a system.

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