The Money Flow Index (MFI) uses price and volume and the concept of accumulation distribution to create an overbought and oversold indicator that is helpful in confirming trends in prices and warning of potential reversals in prices. The inputs to the Money Flow indicator are given below:
The chart below of Google (GOOG) stock shows the Money Flow Index in action:
In the chart above of GOOG, the downtrend in price was confirmed by the downtrend in the Money Flow Index. Once the MFI entered the oversold area, traders might be advised to begin to reduce their short sell positions and buy to cover.
Later, the price of Google increased, and the MFI indicator confirmed that increase. This is a signal that suggests that the trend in Google still might have buying pressure and that the stock trader might want to continue holding their long position in the stock.