What is the MFI indicator?
MFI (Money Flow Index) indicator or money flow indicator is an oscillator that uses both price and volume to measure buying pressure.
This is an commonly used indicator in technical analysis. To simplify the concept of the MFI indicator, you can understand MFI helps you understand that such an asset type electronic money, stocks,… really attract investors.
MFI indicator is related to relative strength index RSI but associated with volume, while RSI is related to price only.
How the MFI indicator works
The MFI indicator is calculated by accumulating positive and negative cash flow values, then creating a Money Ratio. The cash flow ratio is then normalized to the MFI oscillator form.
Cash flow is positive when typical price increases (buying pressure) and negative when typical price decreases (selling pressure). Then a ratio of positive and negative cash flows is fed into an RSI formula to produce an oscillating indicator that moves between 0 and 100.
The MFI indicator is best suited to identify reversal and extreme prices with many different signals.
- Looking at the chart above you can see: Overbought occurs below 20 and overbought occurs above 80. Market conditions are the factors that influence these levels.
- Draw a line from the highest peaks or the lowest bottoms. However, this is not enough to draw conclusions for you to open a trading position. That is still the reason that I advise you to combine other indicators. You should see more MA, MACD, Elliott wave,...
- One point to note is that, in a strong trend, MFIs can remain overbought for a long time.
- Divergence can signal a price reversal. If the price creates a high low, the MFI indicator does not confirm it.
How to calculate MFI
That's a lot of calculations, because MFI requires it:
- The first is the Typical Price (high price + low price + closing price) / 3.
- Next to the cash flow. Money Flow = Typical price * Volume. If today's typical price is greater than yesterday's typical price, then it is considered a positive cash flow. If today's price is lower then it's called negative cash flow.
- And the ratio of cash flow = Positive cash flow / Negative cash flow.
Positive cash flow is the sum of positive cash flows in the specified time. And so is the negative cash flow, which is the sum of the negative cash flows during the specified time. The appointed time is usually 14 stages. Finally going to the need to calculate is:
Money Flow Index MFI = 100 - 100 / (1 + cash flow ratio)
The difference holds the MFI indicator and the relative strength indicator RSI
MFI and RSI are very closely related. As mentioned, the main difference is the MFI combining price and volume. While the RSI is related only to the price.
Supporters of volume analysis believe that the MFI indicator is a leading indicator. Therefore, they also believe that MFI will provide signals and warnings about possible reversals. That is, the trend is more timely than the RSI.
You can see that MFI, or RSI is simply a combination of different market factors and conditions. Therefore, will provide signals at different times. So it is difficult to identify which is better than the other.
Disadvantages of MFI indicator
Advantages you can see through the way it works. So what's the downside? Let's find out together.
MFI indicator may produce wrong signal. This is the same for every indicator, just a little bit different from its interpretation.
This is when the indicator performs something that indicates a good trading opportunity. But then the price did not move as expected resulting in a loss. A difference may not lead to a price reversal.
Please rate this point through the following example:
While divergence can lead to price reversals in some times. But divergences will not be present in all cases of price reversals.
Therefore, traders should use other forms of technical analysis and risk control and not just rely on a separate indicator. This I always remind you, so keep in mind.
Technical buying and selling using MFI
Use MFI and you wonder: Is there any way to trade when you see a warning? So take a look at this technique:
- When to buy: Notice when MFI falls below 20. That means going into oversold area. It then bounces off of 20, can make corrections, but it is still above 20. When the MFI is above the previous high it can be considered a good buy signal.
- When to sell: As the definition says. MFI goes up through the 80 zone. Then lower the stalk below 80, adjust the adjustment but still below 80. At that time, the market was short selling, considering profit taking.
Another indicator Blogtienao provides for you. With the provided indicators please link and use them and give reviews about it. The article is not investment advice so please consider before making your position. Thanks!