Closely resembling RSI in both the calcualtion and the indicator, the MFI places a weight on volume this way the flow of money into an asset can be measured. Through this, it can be a proper measure of price and demand for a product. It works by comparing money flowing in and out of a security, then comparing it to price to determine either a strong or weak trend.
Like RSI, the Money Flow Index is measured on a scale of 0-100. Most often, it is used on a 14-day period. It is also used on a 30-day period as well. If price is greater than it were yesterday, it is considered positive flow. Likewise, negative flow is money flowing out. If using a 14-day average, the sum of all those days is averaged to determine either positive or negative flow of money. It is then revealed and plotten on the chart to form the MFI trend.
On the scale of 0-100, if the MFI crosses above 80, it is considered to be overbought. It is oversold when the MFI crosses under 20.
If prices trend upwards, MFI trends downwards. If prices trend downwards, MFI trends upwards. This happens because we like to buy when prices are low, and sell when prices are high.
Like all other indicators, use in conjunction with another indicator. MFI can also be used to reveal divergence patterns, however, divergences can last for a long duration through the MFI indicator.
As you can see, when the MFI is used as a divergence indicator, it can be extremely powerful. But don't be deceived when using it in its traditional way. Note how the MFI is marking a sell signal since it is overbought when above the 80 level (around November), yet it the opposite occurred - it diverged and rose.
Here is an example of MFI being used as it is intended for. MFI was on the rise due to increase in buying. With increase in buying comes an increase in prices. Notice the slight divergence around November 13th - the MFI decreased, yet the price kept increasing.
