The Money Flow Index (MFI) is a momentum indicator and is calculated by taking an indexed value based on price and volume for a user defined number of bars. Taking an average of the high, low and close prices and then multiplying that by the volume is the first step. This number is then compared to the result for the previous bar.
The MFI helps decide the validity of a trend. Positive Money Flow occurs when a stock is purchased at a higher price (uptick). Negative money flow occurs when a stock trades at a lower price (downtick).
Typically, the best Money Flow signals occur when the price and volume of the chart being analyzed has also set up a bullish or bearish pattern.Using the Money Flow for additional confirmation of what has already been "read" in the chart can be a powerful addition to the assessment tools used by a technical analyst.
The use of both price and volume provides a different perspective from price or volume alone. The Money Flow indicator tends to show dramatic oscillations and can be useful in identifying overbought and oversold conditions.