what is money flow index

The Money Flow Index (MFI) is a technical analysis indicator that helps identify overbought or oversold conditions in an asset by analyzing both price and volume data. Here's a detailed overview:

1. **Definition**: The Money Flow Index is a momentum indicator that oscillates between 0 and 100. It is used to measure the strength of money flowing into and out of an asset, with higher values indicating strong buying pressure and lower values suggesting selling pressure.
2. **Calculation**: To calculate the MFI, you need to compute the typical price for a period, which is the average of the high, low, and close prices. Then, you calculate the raw money flow by multiplying the typical price by the volume. Positive money flow is accumulated over periods where the typical price increases, and negative money flow is accumulated where the typical price decreases. The money flow ratio is the ratio of positive to negative money flow, and the MFI is calculated as 100 minus the reciprocal of the money flow ratio.
3. **Interpretation**: An MFI value above 80 is typically considered overbought, indicating a potential for a price correction or reversal. Conversely, an MFI value below 20 is considered oversold, suggesting a potential for a price rebound. The MFI can also be used to identify divergences, which occur when the price makes a new low or high, but the MFI does not, indicating a potential trend reversal.
4. **Trading Strategy**: The MFI can be used as a standalone indicator or combined with other indicators to develop trading strategies. It can help traders identify entry and exit points, as well as potential trend reversals. Backtesting has shown that the MFI can be a profitable indicator, outperforming the S&P 500 over certain periods.

In summary, the Money Flow Index is a valuable tool for traders looking to analyze market sentiment and momentum by combining price and volume data. It provides insights into overbought and oversold conditions, helping traders make informed decisions about when to enter or exit positions.