What is the MFI indicator?
MFI (Money Flow Index) Indicator The money flow indicator is an oscillator that uses both price and volume to measure buying and selling pressure.
This is a fairly commonly used indicator in technical analysis. To simplify the concept of the MFI indicator, you can understand that the MFI helps you understand that an asset class like electronic money, stocks,... are they really attracting investors?
The MFI indicator is related to the relative strength index RSI but combined with volume, while RSI is related only to price.
How the MFI . indicator works
The MFI indicator is calculated by accumulating positive and negative money flow values and then generating a Money Ratio. The cash flow ratio is then normalized to the MFI oscillator.
Money flow is positive when typical prices rise (buying pressure) and negative when typical prices fall (selling pressure). A ratio of positive and negative money flows is then fed into an RSI formula to create an oscillator that moves between 0 and 100.
The MFI indicator is best suited for identifying price reversals and extremes with various signals.
- Looking at the chart above you can see: Oversold levels occur below 20 and overbought levels occur above 80. Market conditions are a factor influencing these levels.
- Draw a line from the highest highs or lowest lows. However, this may not be enough to come to a conclusion for you to open a long position. That's still the reason why I recommend combining other indicators. You should see more MA, MACD, Elliott wave,...
- One point of note is that, in a strong trend, the MFI can remain overbought for a long time.
- Divergence can signal a price reversal. If the price makes a high a low that the MFI indicator does not confirm.
How to calculate MFI
That's quite a calculation, because the MFI it requires:
- The first is the Typical Price = (high price + low price + closing price) / 3.
- Next comes the cash flow. Money Flow = Typical Price * Volume. If today's typical price is greater than yesterday's typical price, that is considered positive money flow. If today's price is lower, it is called negative cash flow.
- And Cash Flow Ratio = Positive Cash Flow / Negative Cash Flow.
Positive cash flow is the total positive cash flow over the specified period. And so is the negative cash flow, it is the total negative cash flow over the specified period. The indicated period is usually 14 periods. Finally coming to what needs to be calculated is:
Money Flow Index MFI = 100 – 100 / (1 + cash flow ratio )
Difference between the MFI indicator and the relative strength indicator RSI
MFI and RSI are very closely related. As mentioned, the main difference is that the MFI combines price and volume. While the RSI is only related to price.
Proponents of volume analysis believe that the MFI indicator is a leading indicator. Therefore, they also believe that the MFI will provide signals and warnings about possible reversals. That is, follow the trend more timely than the RSI indicator.
You can see that the MFI, or RSI, is simply a combination of different factors and market conditions. Therefore, will provide signals at different times. So it's hard to say which one is better than the other.
Disadvantages of the MFI . indicator
The advantage you can see in the way it works. So what is the downside? Let's find out with me.
The MFI indicator can generate false signals. This is not the same with any indicator, just its interpretation is a little different.
This is when the indicator does something that presents a good trading opportunity. But then the price doesn't move as expected resulting in a losing trade. A divergence may not lead to a price reversal.
Let's evaluate this point by the following example:
While divergence can lead to price reversals at times. But divergence will not be present for all price reversals.
Therefore, traders should use other forms of technical analysis and risk control and not rely solely on a single indicator. This I always remind you guys, so please keep in mind.
Buying and selling techniques using MFI
Use MFI and you wonder: Is there any trick to trading when you see a tick. So take a look at this technique:
- When to buy?: Watch out when the MFI falls below 20. That is entering the oversold zone. It then bounced off 20, possibly making a correction, but it's still above 20. When the MFI crosses the previous high, that's a good buy signal.
- When to sell?: As the definition I said. MFI is going up through the 80 zone. That is forward and oversold zone. Then dropped the stalk below 80, corrected but still below 80. At that time, the market was selling short, consider taking profits.
Another indicator that Blogtienao provides for you. With the provided indicators please link and use them and give a rating on it. This article is not investment advice, so consider it before making your position. Thanks!