What is Money Flow Index (MFI)?
Let's find out Money Flow Index (MFI) meaning, definition in crypto, what is Money Flow Index (MFI), and all other detailed facts.
Money Flow Index (MFI) was developed by Avrum Soudack and Gene Quong as an indicator that uses price and volume to determine if an asset is under purchasing or selling pressure.
Purchasing pressure can be indicated when there is an unusual rise in price showing a positive money flow. Selling pressure, on the other hand, can be indicated when there is an unfavorable fall in price showing a negative money flow.
The sum of positive and negative money flows creates a money flow ratio (often known as a money ratio). This ratio is used to determine the MFI, and it ranges from 0 to 100. Since it uses volume and price, it can be used to predict both – price peaks and troughs.
What Is the Purpose of the Money Flow Index (MFI)?
When it comes to studying a divergence in an asset's chart, the MFI is one of the most effective tools for that. A divergence occurs when the MFI oscillator moves in the opposite direction of the price, indicating that the present price trend is reversing. Because of the risk of a price reversal, experienced traders avoid opening deals when an asset is overbought.
MFI is linked closely to the Relative Strength Index (RSI). However, they are not the same because the MFI indicator, unlike the RSI, takes volume into consideration. Many market analysts prefer MFI to RSI because it provides more timely signs and warnings of impending reversals.
What Is the Best Setting for Money Flow Index (MFI)?
There are various MFI settings that depend on traders but the most recommended one is setting the overbought signal line to 80 and the oversold signal line to 20. When an asset is traded above its intrinsic or fair value – it is overbought, and when it is traded at a lower price – it is oversold.
Money Flow Index (MFI) Formula
However, note that even though the MFI is a pretty reliable indicator, it can still provide you with some misleading information due to the lack of movement in the price action of an asset in the buying window.
Besides, the signals about price reversal indicated with MFI might not be very consistent all the time which is why you should consider using other technical indicators (like OBV indicator, Aroon indicator, RSI, MACD, etc.) additionally.