The Money Flow Index (MFI) is often called the "volume-weighted RSI." It combines price and volume data to measure the strength of money flowing in and out of a security. Unlike RSI which only uses price, MFI gives more weight to high-volume price moves โ making it more sensitive to institutional activity.
MFI Calculation (Default: 14 period)
Typical Price = (High + Low + Close) รท 3
Raw Money Flow = Typical Price ร Volume
Positive Money Flow = Sum of Raw MF on up days (14 periods)
Negative Money Flow = Sum of Raw MF on down days (14 periods)
Money Flow Ratio = Positive MF รท Negative MF
MFI = 100 โ (100 รท (1 + Money Flow Ratio))
Range: 0 to 100
Reading MFI Levels
| MFI Level | Signal | Interpretation |
|---|---|---|
| Above 80 | Overbought | High buying pressure โ potential reversal |
| 50โ80 | Bullish | Strong positive money flow |
| 50 | Neutral | Balanced buying and selling |
| 20โ50 | Bearish | Strong negative money flow |
| Below 20 | Oversold | High selling pressure โ potential reversal |
MFI vs RSI โ Key Differences
| Feature | MFI | RSI |
|---|---|---|
| Uses volume | Yes | No |
| Sensitivity | More (volume spikes) | Less |
| False signals | Fewer (volume filtered) | More |
| Best use | Confirming price moves | Momentum and divergence |
MFI Divergence Strategy
Bullish MFI Divergence:
Price makes a lower low but MFI makes a higher low (below 20)
Meaning: Selling pressure is weakening despite price falling
Signal: Institutional accumulation likely โ reversal imminent
Bearish MFI Divergence:
Price makes a higher high but MFI makes a lower high (above 80)
Meaning: Buying pressure is weakening despite price rising
Signal: Distribution likely โ reversal downward imminent
Price makes a lower low but MFI makes a higher low (below 20)
Meaning: Selling pressure is weakening despite price falling
Signal: Institutional accumulation likely โ reversal imminent
Bearish MFI Divergence:
Price makes a higher high but MFI makes a lower high (above 80)
Meaning: Buying pressure is weakening despite price rising
Signal: Distribution likely โ reversal downward imminent
MFI divergences on NSE are particularly reliable around FII heavy buying or selling periods. When price drops but MFI holds up, it suggests institutions are absorbing selling โ watch for a sharp reversal.
Failure Swings
Bullish Failure Swing:
1. MFI falls below 20 (oversold)
2. MFI bounces above 20
3. MFI retests but stays above 20 (higher low)
4. MFI breaks above the previous high โ Strong buy signal
1. MFI falls below 20 (oversold)
2. MFI bounces above 20
3. MFI retests but stays above 20 (higher low)
4. MFI breaks above the previous high โ Strong buy signal
Limitations
- On NSE, circuit breakers and auction-based price discovery can distort MFI on illiquid stocks
- Best used on high-volume NSE stocks โ NIFTY 50 constituents, BANK NIFTY stocks
- Like RSI, can stay in overbought/oversold territory in trending markets
