MFI Abbreviation

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Popular abbreviations of MFI:

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What does MFI mean?

In Finance, MFI is the acronym for Money Flow Index. It is an indicator depicting the inwards and outwards flows of money into an asset over a period of time. It uses the volume and price data of the asset to identify the oversold or overbought signals. It is very useful for predicting a change in price trends. The values of the Money Flow Index can range from 0 to 100.

MFI involves predictions based on both price and volume as opposed to Relative Strength Index which only uses price and is thus deemed to be better. Because of the incorporation of volume, the money flow index can identify price extremism and reversals with diverse signals.

Calculation of MFI

• Step 1: Calculation of typical price which is the average of high, low and closing price of an asset.
• Step 2: Positive and negative money flow calculations by multiplying the typical price with the volume. Positive money flow is found by summation of all money flows on days when the typical price was higher than the previous day. Negative money flow is found in the exact same way by adding money flow of days when the typical price was lower than the previous day.
• Step 3: The money ratio is calculated as the ratio of positive to negative money flow.
• Step 4: Finally money flow index is found out by the formula:

Money Flow Index (MFI) = 100 – [100 / (1 + Money Ratio)]

What does MFI depict?

MFI generally depicts the trading of a particular stock. A value less than 20 depicts oversold while a value above 80 says overbought. MFI beats the standard buy and hold technique and is therefore prominently used. But studies showed that it doesn’t offer any advantage in trading and relevant optimization is necessary.

Limitations of MFI

There are certain limitations along with the money flow index. The indicator can predict false signals. It happens when it indicates a good trading opportunity but the price doesn’t rise as high as expected.

The index may also not predict some crucial information sometimes. Due to this, it is a better practice to use other tools and indicators as well instead of relying completely on MFI.