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

In the past few weeks, we have focused on a number of technical indicators (our Reviews of how the Parabolic SAR và 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) và how you can apply it successfully in the financial market.

What is money flow index indicator?

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

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

The best way to lớn think of the MFI is lớn consider the RSI, which we covered before. Basically, Gene và Avrum understood the importance of volume and how it affects the markets. They therefore added volume to lớn 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 khổng lồ know how these indicators are calculated.

While we have sầu been in the trading business for many years and 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 vị this by adding the high, low, & cđại bại prices và then dividing the total by three.After finding the typical price, you calculate the Raw Money Flow. You vị this by multiplying the Typical Price with the volume.Calculate the Money Flow Ratio. You vì chưng this by dividing the period (often 14) positive 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 to lớn the RSI. The big difference between the two is that the MFI incorporates volume. Because of this, the MFI tends to 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 speed of change of a financial asset & helps lớn identify overbought & oversold levels.

The RSI is calculated using the formula below.

RSI = 100 – 100/ 1 + RS

where the RS refers to the relative strength.

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A key difference between the RSI and the MFI is the mặc định locations. In the RSI, the mặc định oversold level is 30 while the overbought is at 70. In the MFI, the two defaults are at đôi mươi và 80, respectively.

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

How to lớn Use the money flow index

A good way to use the money flow index is to identify the overbought & oversold levels. When the MFI is above sầu 80, the price is said to lớn be overbought. It is said lớn 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 khổng lồ move sầu higher when it reaches the overbought level of 80. It may also continue to lớn move sầu lower when it moves to lớn below 20. This happens when there is a very svào trend.

The chart below shows the MFI in action on the Apple stochồng.


MFI on Apple Stock

Using the MFI to lớn find divergence

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

First, you need lớn look at an asset’s price visually and see the initial trover. Second, you should look at the performance of the MFI và 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 trend is about to start. A good example of this is in the Microsoft nói qua price below.


Divergence found in Microsoft Stock with MFI. Chart from Tradingview

As shown in orange, the MSFT stoông xã price is generally in an upward trkết thúc. 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 lớn identifying overbought & oversold levels, another key method of using the MFI is khổng lồ follow the trend. In this, you should buy the asmix when the MFI is rising & vice versa.

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Strategies for your Day Trading

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