Money Flow Index (MFI). If you are a trader who subscribes to the principles of technical analysis, you must be familiar with the Relative Strength Index (RSI). Indicators like the Relative Strength Index (RSI) help traders spot potential trend reversals by signaling when a market is overbought or oversold and when prices are diverging or converging. Among the set of technical indicators used to analyze the financial markets, the Money Flow Index serves a similar purpose to the Relative Strength Index (RSI), however it also takes into account volume in addition to closing price (MFI). Analysts who trade according to the “volume influences price” idea will be pleased to learn that the MFI takes trading volume into account.
Define MFI. The key components that kienthucforex.com wishes to share with you are the calculation method, the meaning, and the best way to utilize the MFI indicator.
What is MFI ?
Overbought/oversold, divergence/convergence, and trend identification are the three primary trading indications provided by the Money Flow Index (MFI), an oscillator whose value ranges from 0 to 100. Traders seldom employ the MFI’s signal because, in particular, the MFI’s trend determination function is not as successful as most other trend indicators. Both of the other two signals are also quite robust.
Gene Quong and Avrum Soudark created the MFI. Using the RSI’s characteristics and adding the volume component, the MFI is often referred to as the volume-weighted RSI or the mass-weighted RSI. According to these two writers, technical indicators that are based only on price fluctuations do not capture the whole picture since volume increases as the market approaches a peak or bottom. place of business. As a result, the RSI was improved by include the volume component. For this reason, MFI is categorized as volume indicators on trading platforms.
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How is Money Flow Index (MFI) calculated?
If the values of the RSI depend only on the closing price and the formula is quite simple, the MFI depends on the closing price, the highest price and the lowest price, of course, the volume of transactions, moreover , the process of calculating an MFI value also goes through many different steps.
- Formula for calculating MFI:
Step 1: Calculate the symbolic price (Typical Price)
TP = (High + Low + Close) / 3
Step 2: Calculate the cash flow (Money Flow)
MF = TP * Volume
MF is positive cash flow MF(+) if the closing price is higher than the previous session. Conversely, MF is a negative cash flow MF(-) if the closing price is lower than the previous session.
Step 3: Calculate the cash flow ratio (Money Ratio)
MR = MF (+.14) / MF (-.14)
Step 4: Calculate the value of the MFI . indicator
MFI = 100 – [100 / (1+MR)]
In there:
- High, Low, Close: respectively the highest price, lowest price, closing price of each trading session in the cycle.
- Volume: volume of transactions per session in the cycle
- MF (+,14): total positive cash flow period 14, MF (-,14): total negative cash flow period 14.
The number 14 is the period that the author recommends when using this indicator. However, depending on each strategy, each time frame, traders can flexibly change the cycle to suit and trade with the highest efficiency.
The Money Flow Index (MFI) Indicator: What it Is and What It Means
Let’s go through the method for calculating the MFI indicator before diving into an explanation of its significance.
- Between those two points, the MFI will ebb and flow.
- As the MR goes below zero, like when MF (+,14) goes below zero, the MFI becomes close to the zero line. This indicates that selling pressure is greater, bulls selling is dominant, and the number of bearish days in the cycle is more than the number of bullish days.
- As MR tends toward infinity, as shown by MF (-,14) going to 0, the MFI rises and eventually reaches 100. If the number of days with a price rise is more than the number of days with a price decrease, then purchasing pressure is strong. purchasers are taking the lead instead.
- If the MFI value is either 0 or 100, then the price has gone down in each of the 14 trading sessions throughout the considered cycle, and there has been not a single session in which the price has gone up. A market reversal is more likely to occur when the price is decreasing, since this indicates that the market is oversold or overbought.
- In reality, it is quite uncommon for the MFI to go close to either the 0 or 100 line, thus traders often use the 80 and 20 lines as overbought and oversold signals. Oversold and overbought indications are more harder to see when prices are near the zero and one hundred lines, but once they do emerge, prices always turn around.
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How to set up the Money Flow Index (MFI) indicator on MetaTrader 4
Follow this link to learn how to add the MFI indicator to your MT4 chart: Drop in a? The Indicators? The numbers? Index of Funds Flow.
The resulting settings dialogue box looks like this:
- The period of the indicator may be adjusted in the Parameters menu; the standard setting is 14, but this can be modified to fit your trading style. The thickness, shape, and color of the indication may all be customized. Next choose the two options labeled Fixed minimum and Fixed maximum to set the bottom and higher limits, respectively.
- The Levels tab has predefined levels for oversold and overbought conditions of 20 and 80, respectively. Here, you may update the settings by double-clicking the Level box and making the necessary adjustments. Instead, you may use the Add and Delete buttons to enter or delete additional values. Then, give the lines a color and a narrow width.
To conclude the installation, choose OK. Underneath the price chart, the MFI indicator will appear as a line graph.
Best practices for using the MFI indicator while trading the FX
The MFI indicator, as was previously mentioned, offers three trading signals: trend identification, oversold/overbought, and divergence/convergence. Here, we’ll demonstrate MFI’s usage with all three signals.
Learn how to spot market shifts using MFI
Similar to how trading with RSI works, the 50 or 45-55 lines may be added to MFI to help identify the market trend.
The market is in an upswing if the MFI stays above the 50 line.
The market is in a decline if the MFI stays below the 50 line.
For instance:
Moreover, this signal may be used with the 45-55 lines in place of the 50 lines to determine the trend. Specifically:
The market is in an upswing if the MFI stays above the 55 line.
If the MFI stays below -45 for an extended period of time, the market is in a downturn.
For instance:
Indicators of being overbought or oversold
As the MFI rose steadily and went over the 80 line, it indicated that buyers had become overextended in the market. The market’s overbought condition raised the prospect of a downward trend. Indication to place a sell order.
As the MFI progressively dropped and crossed below the 20 line, it signaled an Excessive SELL condition in the market. Possible bullish reversal after oversold readings? This is a buy signal.
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Here’s the specifics of the deal:
Crossing the MFI’s 20 line from below the oversold region is a buy signal. If the MFI has just passed above the 20 line or the bullish candle on the price chart has been confirmed, place an order.
When the MFI drops below the 80 line, indicating a sell signal, the market is considered to be in an overbought state. Similarly, place a trade when the MFI has recently breached the 80 level or after a bearish candle on the price chart has been confirmed.
For instance:
After placing a Buy order for the first time, if the price forms a long-legged Doji candle, it is possible that the price will break out in a given direction, maybe up or down drastically; however, because it occurred after a protracted decline, the price is likely to revert to the upside. Meanwhile, the MFI is moving into oversold territory, suggesting the market may soon reverse. Wait for the MFI to go above the 20 line before placing a buy order.
Tweezer Bottom, a bullish reversal candlestick pattern that arises when the MFI falls into the oversold region, is very similar to the second Buy order in that it increases the likelihood of a price reversal.
Third Sell Order: Without broad observation, it’s hard to detect a signal other than the MFI moving into overbought territory. Yet if you expand your view of the price chart, you’ll see the market is on a long-term decline.
The MFI moves into the overbought zone as price approaches the downtrend’s trendline, bolstering the indication that price will turn down.
All three of the aforementioned situations share the fact that we supplement the MFI’s signals with additional verification methods.
As an example, the market remains flat even after MFI enters an overbought/oversold zone.
Even though the MFI has entered overbought territory, the price has continued to go upward. In spite of the fact that the price dropped immediately after the MFI passed the 80 line from the peak, the drop was minimal.
Similarly, the MFIs have entered oversold area, but prices have continued to decline, suggesting that the oversold signals are nothing more than minor price bounces inside a much larger downturn. Even if the price has increased after a third oversold signal, this rise has occurred within an extremely short period of time, making the trade inefficient due to a poor Risk:Reward ratio.
- Trading using overbought/oversold indicators: a how-to guide
The overbought and oversold indications from the MFI occur often, albeit not always. Consequently, after exiting these overbought/oversold situations, we need to monitor the movement of MFI in addition to combining with other analytical techniques.
Here’s how:
- The first is to see whether the MFI has left its overbought or oversold territory, indicated by a cross above or below the 80-level (crossing the 20 line from below).
- Keep an eye on the MFI as it moves; often, the indicator will return to the 20 or 80 lines before decisively breaking out of the oversold or overbought zones.
- The MFI will oscillate close to the 20 line after an oversold signal has been generated, but it will not return to the oversold zone.
- If the MFI rises over the 80 level, it will remain above that level and imply an overbought market.
- When the MFI increases, breaks the previous high, and then breaks the retest, the entry is Buy. As soon as the MFI decreases, breaching the previous bottom, terminating the retest, enter a Sell trade.
For instance:
- At the top spot, the MFI has entered an oversold region.
- Then make a break for it up above the 20-line to escape this region, and ride the fluctuations there.
- MFI retested the 20 line twice without returning to the oversold region (positions 2, 3)
- When the MFI reaches position 4, it has reached a new peak (and also the resistance of the MFI in this case).
- Go in at number 4, and set your stop loss below the price chart’s closest bottom.
Make a killing when the MFI rises beyond 80. (position 5)
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For instance:
The MFI of the Buy order here is quite similar to the Buy order in the aforementioned example:
- At the top spot, the MFI has entered an oversold region.
- The Money Flow Index (MFI) briefly returned to the 20 line, but it did not reach the oversold zone again.
- Fourth place: MFI rises above prior peak.
- When the MFI passes the 80 line from above, place a Buy order at position 4, and then close the transaction at position 5.
Order to sell:
- The MFI enters the overbought region at point 1′.
- The MFI then returned to the overbought 2′ level, where it remained stationary.
- If the MFI drops below level 3′, you should start placing Sell orders.
- When the MFI drops below the 20 line, put a stop loss order above the uptrend’s peak and a take profit order at position 4′.
Signs of Divergence and Convergence
- When price hits a new high while the MFI makes a new low, this is known as a divergence. Although a higher high in price indicates that the market is still in an uptrend, a lower high in the MFI suggests that the uptrend is weakening, suggesting a possible reversal to the negative.
- When price makes a lower low and the MFI makes a higher low, is this convergence? The market turns up again.
Market direction may be determined with the use of MFI and price divergence or convergence signals, but they do not indicate when to enter or quit a trade. If you want to use this signal properly, you’ll need to combine it with additional tools like Japanese candlestick patterns, price patterns, and technical indicators to pinpoint an appropriate entry and exit.
For instance:
In this situation, the appearance of a divergence signal suggests that a reversal to the negative is possible for the price. The price is creating a Head and Shoulders pattern, a well-known bearish reversal price pattern in forex, as shown in the accompanying price chart.
The next step is to sketch the pattern’s neckline, which will serve as the point of entrance. As soon as price action (1) breaks above the neckline, or (2) retests the neckline, an order may be placed (position 2).
Keep your stop loss order above the high of the pattern. The pricing pattern indicates a take profit point that is equal to the distance from the entrance point to the height of the person’s neck. Instead, you may close the trade when the MFI indicator drops below the 20 line, which is a hint to take profit.
For instance:
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Here, the divergence/convergence signal between the MFI and the price may be used in conjunction with the trend line to provide an entry point for trading.
When the MFI and the price begin to show signs of convergence, it means that the MFI has just exited the oversold level, increasing the likelihood of a positive reversal.
There are two possible approaches to locating the doorway.
Option one: make advantage of MFI’s oversold indication. In this approach, you may carry out the same kinds of transactions as in the preceding instances. Once the MFI retests the 20 line, enter when it breaks out of the prior high.
Step 2: Establish an entry using the trendline. If the price is falling, you may place a buy order when it breaches the downward trendline.
As can be observed, the entrance point is equivalent in both strategies. Get out of the trade when the MFI rises over the 80 level.
Note That while divergence/convergence indications are typically extremely lucrative because traders may catch the trend, they do not always happen, like overbought/oversold signals. , there will also be instances when “life is not like a dream”.
For Instance, a Convergence Signal Appears, but the Price Continues to Fall
Trading based just on MFI signals is ineffective since it is only one of a larger trading strategy. The greater the number of instruments used, and the congruence between them, the higher the probability of a profitable deal. Unfortunately, it will be difficult to observe and confusing to use many analytic tools on the same chart, making it inappropriate for novices. Consequently, for each indication, just one or two additional tools need to be selected since they provide the optimal synergy.
With any luck, the information presented here will help you learn how to trade using MFI, a comprehensive RSI. The above information is by no means exhaustive, but it will provide you with the greatest possible basis for making effective use of the MFI indicator. You will uncover your personal “holy grail” in trading with MFI if you put in the time and effort to experiment with different techniques and analytical tools on a regular basis.
HOPE YOU DO WELL.
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