IndicatorForex.com

The Money Flow Index is an oscillator similar to the Relative Strength Index. However, it is different than most indicators, in the fact that it takes Volume into account. By considering volume in calculation, this indicator can plot market insights that cannot be seen by price alone, and therefore by price-based indicators. In this article we will present the calculation and interpretation how the Money Flow Index.

 Absolutely NO THINKING is needed, just buy when Blue and sell when Red!

Calculation
First of all, for each of 14 last bars the Money Flow is calculated:
Money Flow = (Day High + Day Low + Day Close)/3 * Volume

The sum of all positive values of Money Flow is the Positive Money Flow, and sum of all the negative values is Negative Money Flow. The sum is used to calculate the Money Ratio:
Money Ratio = Positive Money Flow / Negative Money Flow

Then, the Money Flow Index is calculated using the following formula:
Money Flow Index = 100 - (100 / (1 + Money Ratio))

The period(default = 14) controls the sensitivity of the Money Flow Index. Greater period will cause the indicator to respond slowly to changes while lower period will cause great sensitivity of the indicator and more whipsaw signals.

Interpretation and Trading Signals
Interpretation is done by several trading methods:

Middle-Line Cross
The first and most simple trading method to use with the Money Flow Index is the Middle-Line Cross. Inferred from its name, the Middle-Line cross signals trades when the MFI crosses the value of 50.

Long trades - When MFI crosses 50 from below.
Short trades - When MFI crosses 50 from above.

This is a trend-following approach that works best in trending markets. Try to filter range periods in order to avoid whipsaws and false signals.

Overbought \ Oversold Trading
This trading method is similar to the Relative Strength Index trading method. Its basis is the 80-20 levels: The Overbought and Oversold levels. Reading below 20 of the indicator are considered oversold, and reading above 80 are considered overbought. Conservative traders can enter at 30-70 for late entry and more confirmation.

Long trades - When MFI crosses 80 from above.
Short trades - When MFI crosses 20 from below.

This is a contrarian trading method that enters trades against market direction in attempt to pin-point reversals. Use extra confirmation as in strong trends Contrarian signals tend to fail more.

Divergences
Divergence traders attempt to find periods in which the visual action of the indicator is opposite to the visual action (chart) of price. Such anomalies can alert of future reversal at price. These signals are extra-strong in the Money Flow Index, as they are confirmed by volume as well and not by price alone, as in most traditional FOREX indicators.

Nevertheless, such trading practice is not for beginners as thorough trading experience is needed to trade divergences profitably.