How could Money Flow Index help me making stock buy/sell decision?

(Case Study on Merck)

 

What is Money Flow Index (MFI)

 

The Money Flow Index (MFI) is a momentum indicator that measures the flow of money into and out of a security over a specified period of time.

 

How to calculate MFI

 

The Money Flow Index requires a series of calculations.

Step 1: Calculate Typical Price: 
Typical Price = (High + Low + Close)/3

 

Step 2: Calculate Money Flow: The period's Typical Price multiplies the period's volume
Money Flow = Typical Price * Volume

 

Step 3: Calculate positive money flow and negative money flow

 

If today's Typical Price is greater than yesterday's Typical Price, it is considered Positive Money Flow. If today's price is less, it is considered Negative Money Flow.

Positive Money Flow is the sum of the Positive Money over the specified number of periods.
Negative Money Flow is the sum of the Negative Money over the specified number of periods.

 

Step 4: Calculate Money Ratio

Money Ratio = Positive Money Flow / Negative Money Flow

 

Step 5: Finally, the Money Flow Index is calculated using the Money Ratio

The Money Ratio is then normalized into the MFI oscillator form

 

How this indicator works?

• If MFI > 80, it is indicated overbought;
• If MFI < 20, it is indicated oversold;
• If MFI > 80, and when there is a divergence phenomenon, it is regarded as selling signal;
• If MFI  < 20, and when the deviation occurs, it is regarded as buying signal.

 

Keep in mind, during strong trends, the MFI may remain overbought or oversold for extended periods.

 

Case Study Merck Stock

Below is Merck stock price and MFI as April 11th extracted from moomoo app

As the chart indicated that the MFI is above 99 on April 11th, it is indicated that Merck stock is overbought, however since MFI should not be used alone to make buying or selling decision, investors should also exam RSI and other leading indicators and trend indicators.