Money flow index (MFI) is an
oscillators calculated over an N-day period, ranging from 0 to 100, showing
money flow on up days as a percentage of the total of up and down days. Money flow in technical analysis is typical price multiplied by volume, a kind of approximation to the dollar value of a day's trading.
The calculations are as follows. The
typical price for each day is the average of high, low and close,
Money flow is the product of typical price and the volume on that day.
Totals of the money flow amounts over the given N days are then formed.
Positive money flow is the total for those days where the typical price is higher than the previous day's typical price, and
negative money flow where below. (If typical price is unchanged then that day is discarded.) A
money ratio is then formed
From which a
money flow index ranging from 0 to 100 is formed,
This can be expressed equivalently as follows. This form makes it clearer how the MFI is a percentage,
MFI is used as an oscillator. A value of 80 is generally considered
overbought, or a value of 20 oversold. Divergences between MFI and price
action are also considered significant, for instance if price makes a
new rally high but the MFI high is less than its previous high then that
may indicate a weak advance, likely to reverse.
It will be noted the MFI is constructed in a similar fashion to the
relative strength index Both look at up days against total up plus down days, but the scale,
i.e. what is accumulated on those days, is volume (or dollar volume
approximation rather) for the MFI, as opposed to price change amounts
for the RSI.
It's important to be clear about what "money flow" means. It refers
to rupees volume, i.e. the total value of shares traded. Sometimes
finance commentators speak of money "flowing into" a stock, but that
expression only refers to the enthusiasm of buyers (obviously there's
never any net money in or out, because for every buyer there's a seller
of the same amount).
For the purposes of the MFI, "money flow", i.e. dollar volume, on an
up day is taken to represent the enthusiasm of buyers, and on a down day
to represent the enthusiasm of sellers. An excessive proportion in one
direction or the other is interpreted as an extreme, likely to result in
a price reversal.
The Federal Reserve ramped up monetary stimulus by expanding
"Operation Twist", but disappointed some investors who had been hoping
for more aggressive measures.
Uncertain global and domestic cues weighed on investor sentiments
through today's trade but the market managed to pull back from the lows
of the day and close with smart gains. Sensex closed at 16859, up 153 points and Nifty at 5103, up 39
points from the previous close. 
ALERT ALERT ALERT
