The money flow index (MFI) represents the volume-weighted adaptation of the more widely used relative strength index (RSI). The RSI tracks market momentum through the speed and change in price movements, in contrast to the MFI that more carefully watches buying and selling pressure based on trading volume fluctuations.
Differences in MFI and RSI Tracking
The RSI has become very popular among traders and technical analysts. Typically charted over a 14-day look-back period, the RSI is both range-bound and smoothed, making interpretations straightforward and easy to combine with other indicators. The basic building blocks of the RSI formula are the average gains and average losses within a security's price changes.
The formula for the MFI, on the other hand, uses a typical price and compares it with several different evaluations of money flows in and out of the security. Based on the theory that volume precedes price, the MFI acts as a more ambitious leading indicator than the RSI. Notably, 14-day periods are also the default with the MFI.
Strengths of MFI and RSI
Both indicators are momentum oscillators, though they are generally regarded to have different strengths.
Many traders consider the RSI to be more reliable in showing bull and bear trends using its center line, spotting divergences and overbought/oversold conditions when contrasted with price action. The MFI (as a stronger leading tool) more consistently leaves traditional price action and is best suited to spot reversals and failed signals. Divergences are more serious with the MFI, which introduces volume to magnify the difference between trend strength and price perception.
Despite their similarities, the MFI and the RSI can actually be used in conjunction to confirm signals. The MFI is less of a traditional oscillator, and its underlying formula is largely based on volume, sharing almost none of the average price movement biases of its cousin.