Money Flow Index is an oscillator, created by Gene Quong and Avrum Soudack. This indicator uses price and volume to measure the buying and selling pressure in any security. When the price of any given security rise, the MFI will also rise and it is a sign of buying pressure. Likewise, when the price of a security declines, the MFI will also decline and it is a sign of selling pressure.
This indicator oscillates between 0 to 100 levels. Since MFI is a momentum indicator, it is most suitable to identify price reversal. When the indicator reaches below 20, it is the sign of an oversold market and when it goes above 80, that’s the sign of an overbought market. MFI consists of only one single line, and the default setting is 14. However, it doesn’t mean you can blindly sell or buy security as soon as the MFI reaches 20 or 80 levels. It is important to pair this indicator with some other reliable indicators to get more confirmation. In this article, we have discussed a couple of those strategies.
Typically, most of the stock traders use volume in their trading. They look for divergence between the volume and price. If the price is printing higher highs/ lower lows, but the volume is declining in the market, it could be an indicator of a major trend reversal. Because technical traders believe that the price will always follow the volume. That is the reason why it could be an indicator of a trend reversal. Since MFI indicator integrates volume data in it, traders look for divergence between the price and volume to take trades.
Installing ‘MFI’ on to your charts (Step-by-step procedure)
The Money Flow Index is a standard Meta trader indicator and is available in MT4 platform by default. Follow these simple steps in order to add this indicator on to your charts.
Open your MT4 terminal, click on the Insert > Volumes > Money Flow Index.
A window will pop-up. Here get to change the default time period settings.
In the image below, we have applied the MFI indicator on to a 60-minute EUR/USD chart.
MFI Indicator Trading Strategies
We all are aware of the 95:5 ratio in the Forex market. It means that 95% of the people fail and only 5% will succeed. Traders who rely on one single indicator to place their buy or sell orders belong to the 95%. It is always recommended to pair this indicator with some other credible indicators or candlestick patterns to generate accurate trading signals. We have mentioned a couple of reliable strategies using MFI indicator in this article.
MFI + RSI
In this strategy, we have paired the MFI indicator with RSI to identify the buy or sell signals. Both of these indicators are oscillators. The strategy is simple. When both of our indicators (MFI and RSI) are giving a sharp reversal as soon as they reach the overbought or oversold area, you can consider that as a reliable trading signal. The critical point to remember here is that the indicators must show a sharp reversal. Only then you can consider that as an accurate signal.
In the below chart, you can see our indicators producing both buy and sell signals. The yellow box on the chart indicates that both the indicators reached the overbought areas and gave a sharp reverse. Hence it can be considered as a perfect sell set-up.
Looking at the green boxes, prices were going down sharply and both the indicators gave us a possible sign of reversal as both the indicators are in oversold conditions. The moment we get a sharp reversal, it is an accurate buy signal.
MFI + MA Cross
In this strategy, we have paired the MFI indicator with Simple Moving Averages to generate the buy and sell signals. We are using the default setting of the MFI indicator, and for moving averages, we use a 5 period and 15 period MAs values.
When the MFI is at the overbought area and if the moving average crossover happens at the same time, it can be considered as a sell signal. It is recommended to exit the position when one indicator gives us the opposite signal or when we get the divergence on the chart.
As you can see in the below AUD/CHF 15-minute chart, the overall trend was down. During the pullback phase, crossover happened on the MA, and the MFI indicator gives the reversal at the overbought area. Hence it is a potential sell signal for us.
This is a proven strategy to generate accurate trading signals. As you can see, this strategy gives the sell signal way ahead of time, whereas the rest of the traders are still looking for buy in the market.
The Money Flow Index is a momentum indicator that tells us how much money is flowing in and out in any security over time.
It oscillates between the 0 and 100 values.
We recommend you to not use this indicator alone to generate buy/sell signals. Instead, pair it with some other reliable indicators to gain more accuracy.
MFI is a unique indicator, which combines volume and momentum with an RSI formula.
This indicator also helps you to find the overbought and oversold conditions, and also predicts the major trend changes ahead of time.
Try these strategies in your daily trading activities and let us know if they have worked for you in the comments below. Happy Trading!