The Money Flow Index is used as a momentum indicator that is actually similar to the Relative Strength Index in both interpretation and calculation. Though this is true but, MFI is a more rigid indicator in that it is volume-weighted, and is therefore a good measure of the strength of money flowing in and out of a security. It compares negative money flow to positive money flow to create an indicator that can be compared to price in order to determine the strength or weakness of a trend. The MFI is measured on a 0 – 100 scale and is often calculated using a 14 day period.
The flow of money is the product of price and volume and shows the demand for a security and a certain price. The money flow is not at all same as the Money Flow Index but they are inter-related in a way. The money flow is a component of calculating it, i.e. the Raw money flow.
The MFI can be interpreted much like the RSI in that it can signal divergences and overbought/oversold conditions.
Divergences
Positive divergences between the stock and the MFI can be used as buy signals. On the other hand, negative divergences between the stock and the MFI can be used as sell signals. They often indicate the imminent reversal of a trend. If the stock price is falling, but positive money flow tends to be greater than negative money flow, then there is more volume associated with daily price rises than with the price drops. This suggests a weak downtrend that threatens to reverse as money flowing into the security is stronger than money flowing out of it.
Overbought/Oversold
The MFI can be used to determine if there is too much or too little volume associated with a security. A stock is considered overbought if the MFI indicator reaches 80 and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and below suggests a stock is oversold.