Money Flow Index (Mfi), How To Use Indicator For Profitable Trading

Understvà Price and Volume, and how these can affect market, is important in trading

In the past few weeks, we have sầu focused on a number of technical indicators (our Review of how the Parabolic SAR and the directional movement index works).

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In these articles, you have learned about how you can use these technical indicators successfully in the market. This time, we will look at another indicator that has become relatively popular.

In this article. We will look at the Money Flow Index (MFI) and how you can apply it successfully in the financial market.

What is money flow index indicator?

Money flow index was created by Gene Quong và Avrum Soudak. You will find the indicator in all trading platforms like the MT4 and our PPro8.

The MFI is a leading indicator that uses price và volume lớn show whether the price is overbought or oversold. The index is usually positive sầu when the price is rising & negative sầu when the price is falling.

The best way to think of the MFI is to consider the RSI, which we covered before. Basically, Gene & Avrum understood the importance of volume and how it affects the markets. They therefore added volume khổng lồ the calculation of the MFI.

How khổng lồ Calculate: MFI formula

The MFI is calculated using a very simple formula. As we have sầu written before, you don’t need to lớn know how these indicators are calculated.

While we have sầu been in the trading business for many years & use these indicators often, we don’t know how most of them are calculated.

The MFI is calculated as follows:

You calculate the Typical Price (TP). You bởi this by adding the high, low, and close prices and then dividing the total by three.After finding the typical price, you calculate the Raw Money Flow. You vì chưng this by multiplying the Typical Price with the volume.Calculate the Money Flow Ratio. You vày this by dividing the period (often 14) positive sầu money flow by the period negative money flow.

Finally, the MFI is calculated by using the following formula.

Money Flow Index = 100 – 100 / (1 + Money Flow ratio)

Money Flow Index vs RSI

The MFI is usually interpreted in a similar way lớn the RSI. The big difference between the two is that the MFI incorporates volume. Because of this, the MFI tends lớn act a bit differently with the RSI because volume leads prices.

For starters, the Relative sầu Strength Index (RSI) is a technical indicator that is classified as an oscillator. It basically measures the tốc độ of change of a financial asset và helps to identify overbought và oversold levels.

The RSI is calculated using the formula below.

RSI = 100 – 100/ 1 + RS

where the RS refers lớn the relative sầu strength.

When applied in a chart, the RSI and MFI usually look the same, as shown in the chart below. The purple indicator is the RSI while the green one is the MFI. As you can see, these indicators always move in the same direction.

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RSI VS MFI

A key difference between the RSI & the MFI is the mặc định locations. In the RSI, the mặc định oversold màn chơi is 30 while the overbought is at 70. In the MFI, the two defaults are at trăng tròn and 80, respectively.

However, you can always change these figures in the settings.

How khổng lồ Use the money flow index

A good way khổng lồ use the money flow index is lớn identify the overbought & oversold levels. When the MFI is above 80, the price is said to lớn be overbought. It is said to be oversold when it is below 20.

However, as we mentioned when talking about the RSI, it is not mandatory that a reversal will happen the overbought and oversold levels are reached.

The price may continue lớn move sầu higher when it reaches the overbought level of 80. It may also continue lớn move lower when it moves khổng lồ below 20. This happens when there is a very svào trend.

The chart below shows the MFI in action on the Apple stoông chồng.

MFI on Apple Stock

Using the MFI lớn find divergence

Divergences refer to points where an asset’s price is rising while the indicator is falling & vice versa. Identifying a divergent period early enough can help you see when a reversal is about to lớn happen.

First, you need lớn look at an asset’s price visually và see the initial trkết thúc. Second, you should look at the performance of the MFI and join the key levels.

In this case, if the price is rising while the MFI is moving lower, it could be a sign that a bearish trkết thúc is about to lớn start. A good example of this is in the Microsoft chia sẻ price below.

Divergence found in Microsoft Stoông chồng with MFI. Chart from Tradingview

As shown in orange, the MSFT stoông chồng price is generally in an upward trover. At the same time, joining the upper sides of the MFI shows that it is moving lower. Ultimately, the shares broke out lower.

This is a good example of how this divergence works. However, a key issue is that divergences are rare occurrences in the market.

In addition to lớn identifying overbought and oversold levels, another key method of using the MFI is to lớn follow the trend. In this, you should buy the asphối when the MFI is rising & vice versa.

Strategies for your Day Trading

As you can see, while the MFI is a good indicator, it can also show you the wrong signals. This simply means that it can decline when the price is rising. This happens when there are divergencies.

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A good way to lớn avoid these situations is to combine a number of technical indicators and other analysis tools such as the RSI & Fibonacci Retracement.