What is the difference between positive and negative money flow in MFI for crypto?

The Money Flow Index (MFI) combines price and volume to identify overbought or oversold conditions in crypto, with readings above 80 and below 20 signaling potential reversals.

Aug 05, 2025 at 05:57 am

Understanding the Money Flow Index (MFI) in Cryptocurrency Trading

The Money Flow Index (MFI) is a technical oscillator used in cryptocurrency trading to measure the strength and direction of money entering or leaving an asset. It combines price and volume data to generate signals between 0 and 100, helping traders identify overbought or oversold conditions. Unlike the Relative Strength Index (RSI), which only uses price, MFI incorporates volume, making it a volume-weighted version of RSI. This integration of volume makes MFI particularly useful in the volatile crypto markets, where sudden surges in trading activity can signal major price shifts. The index is typically calculated over a 14-period window, though traders may adjust this depending on their strategy.

Calculating Typical Price and Raw Money Flow

To determine whether money flow is positive or negative, the MFI calculation begins with the Typical Price. This is derived by averaging the high, low, and closing prices for a given period:

Typical Price = (High + Low + Close) / 3

Once the typical price is known, it's multiplied by the volume for that period to obtain the Raw Money Flow:

Raw Money Flow = Typical Price × Volume

This raw value represents the total dollar value of trading activity during that period. However, it does not yet indicate direction—only magnitude. To assign direction, the flow is categorized as either positive or negative based on price changes from one period to the next.

Differentiating Positive and Negative Money Flow

The distinction between positive and negative money flow lies in the comparison of the current period’s typical price to the previous period’s. When the current typical price is higher than the prior period’s, the money flow for that period is considered positive. This indicates buying pressure and suggests that capital is flowing into the cryptocurrency. Conversely, when the current typical price is lower than the previous one, the money flow is labeled negative, reflecting selling pressure and capital outflow.

• If Typical Price (current) > Typical Price (previous) → Positive Money Flow
• If Typical Price (current) < Typical Price (previous) → Negative Money Flow

Note that if the typical price remains unchanged, that period’s flow is usually excluded from the sum of positive or negative flows. This binary classification allows traders to track the momentum behind price movements, with volume acting as a confirmation tool.

Constructing the Money Ratio and MFI Value

After categorizing each period’s flow, the next step involves summing the raw money flow values over the selected period (commonly 14). The Positive Money Flow is the total of all raw money flows during periods where the typical price increased. The Negative Money Flow is the total of all raw money flows during periods where the typical price decreased.

Using these sums, the Money Ratio is calculated:

Money Ratio = (Sum of Positive Money Flow) / (Sum of Negative Money Flow)

This ratio is then used to compute the final MFI value:

MFI = 100 – [100 / (1 + Money Ratio)]

The resulting MFI oscillates between 0 and 100. A reading above 80 is generally considered overbought, while below 20 is oversold. However, the underlying components—positive and negative money flow—are critical in shaping these readings.

Interpreting Positive vs. Negative Flow in Crypto Markets

In the context of cryptocurrency, positive money flow often occurs during bullish trends, especially when strong volume accompanies rising prices. This signals genuine accumulation by informed traders or institutions. For example, if Bitcoin’s price climbs from $30,000 to $32,000 on significantly higher volume, and the typical price increases, the flow is positive, reinforcing the uptrend’s validity.

On the other hand, negative money flow emerges during downtrends with increasing volume. Suppose Ethereum drops from $1,800 to $1,700 on high volume with a lower typical price. In this case, the negative flow suggests active distribution or capitulation. Traders watch for divergences: if price makes a new high but positive money flow weakens, it may indicate a lack of volume support, hinting at a potential reversal.

Practical Example: Applying MFI to a Crypto Chart

To apply MFI effectively on a crypto chart (e.g., Binance or TradingView), follow these steps:

• Navigate to the chart of the cryptocurrency (e.g., Solana).
• Open the indicators menu and search for “Money Flow Index.”
• Select MFI and set the period to 14 (default).
• Observe the MFI oscillator below the price chart.
• Identify periods where MFI rises above 80 or drops below 20.
• Cross-check with volume bars: increasing volume during rising MFI strengthens the signal.
• Look for divergences: price rising while MFI falls may indicate weakening positive flow.

For instance, if Solana’s price reaches a new peak but the MFI fails to surpass its prior high, this bearish divergence suggests that despite higher prices, the underlying buying volume (positive flow) is diminishing—a potential warning sign.

Common Misinterpretations and Key Cautions

A frequent mistake is equating high MFI readings solely with sell signals. However, in strong bull markets, MFI can remain above 80 for extended periods without a reversal. Similarly, prolonged negative money flow during bear markets doesn’t guarantee an immediate bottom. Another pitfall is ignoring volume anomalies; low-volume pumps can generate misleading positive flow readings. Always confirm MFI signals with other tools such as trendlines, moving averages, or on-chain metrics like exchange netflow.

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FAQs

Q: Can positive money flow occur during a price decline?

No. Positive money flow only occurs when the current period’s typical price is higher than the previous period’s. Even if volume is high, if the typical price drops, the flow is negative. A rising volume during a price drop increases negative money flow, not positive.

Q: How does MFI handle periods with no price change?

If the typical price remains unchanged from the previous period, that period’s raw money flow is typically excluded from both positive and negative sums. This prevents neutral periods from distorting the money ratio.

Q: Is negative money flow always bearish?

Not necessarily. Negative money flow indicates selling pressure, but in a healthy uptrend, brief periods of negative flow are normal during pullbacks. The context—such as overall trend and volume—is essential for accurate interpretation.

Q: Can MFI be used on different timeframes for crypto?

Yes. MFI can be applied to any timeframe—1-hour, 4-hour, daily, etc. Shorter timeframes may produce more signals but with higher noise; daily charts offer more reliable readings due to reduced volatility impact.