Money flow index (MFI)

The calculation runs in four steps and each one is worth seeing, because the indicator is often described loosely. First, a typical price is taken for every bar, the average of its high, low and close. Second, that typical price is multiplied by the bar's volume to give the bar's raw money flow. Third, bars whose typical price rose against the previous bar are summed as positive flow and bars whose typical price fell are summed as negative flow, over a lookback conventionally of fourteen periods. Fourth, the ratio between those two sums is rescaled to sit between zero and one hundred.

The result is a bounded oscillator, and the conventions read on it are the familiar ones: readings near the upper end are described as overbought and near the lower end as oversold, with the thresholds set by habit rather than by the mathematics. What distinguishes it from the purely price based oscillators is the volume weighting: a move on heavy volume moves this indicator further than an identical move on light volume, which is the whole reason for using it.

That is also where the trap sits, and it is a serious one in foreign exchange. There is no central exchange in an over the counter market, so no consolidated traded volume exists, and charting platforms substitute tick volume, the count of price updates in the bar. Tick count correlates with activity but it is not quantity dealt, so on a currency chart the indicator is weighting price movement by how often the quote changed. Readings are also not comparable between two platforms whose tick feeds differ, and an overbought reading can persist for a long period in a trending market, which is the standard limitation of every bounded oscillator.