Since the market always experiences constant fluctuations, the use of indicators technical analysis in Forex is indispensable. Among the indicators that are widely applied today, the MFI indicator (Money Flow Index) is the most highly rated. In particular, MFI is related to the RSI (Relative Strength Index) but adds a volume factor. It helps improve analysis accuracy and come up with effective trading strategies. Let Forex Trading explore details about MFI through the article below.
You may not know the characteristics and meaning of the MFI indicator.
To have a clearer view of the MFI indicator and use it effectively, investors need to clearly understand its characteristics and meaning. MFI moves within a value range from 0 to 100. When MFI approaches 0, it shows that sellers are dominant and selling pressure is higher. When the MFI approaches 100, it shows that the number of bullish days is greater than the number of bearish days, and buyers are in control.
When the MFI index has a value of 0 or 100, it usually shows that the market is overbought or oversold, and the possibility of a reversal is very high. However, in reality, MFI rarely reaches absolute values of 0 and 100. Therefore, traders often use thresholds of 20 and 80 to determine overbought and oversold levels.
Basic calculation formula MFI indicator.
Want to clearly understand the nature of the MFI money flow indicator to come up with a trading strategy when using it. Take a look at the MFI calculation formula that Forex Trading provides below:
Step 1: Calculate the typical price
Typical price = (high price + low price + closing price) / 3
Step 2: Calculate cash flow
Cash flow = typical price (TP) × Volume (volume). Cash flow is divided into two types: positive cash flow (MF+) and negative cash flow (MF-):
- MF+: If the current typical price is greater than the previous typical price.
- MF-: If the current typical price is less than the previous typical price.
Step 3: Calculate the money rate
Money ratio (MR) = positive cash flow (MF+) / negative cash flow (MF-)
Step 4: Calculate the MFI index
MFI (money flow index) = 100 – [100 / (1 + MR)]
Note that you can calculate in another way as follows:
- MFI = 100 × (positive cash flow / (positive cash flow + negative cash flow))
In this formula, the MFI index will be expressed as a percentage.
See more: Be more successful through this technical analysis
How to install MFI on MT4 to come up with a trading strategy
To install the MFI money flow indicator on the MT4 trading platform, you can follow these steps:
Step 1: Access the “Insert” section and select “Indicators”, then select “Volumes” and select “Money Flow Index”.
Step 2: A new window will appear with the following options:
- “Parameters” section: Select the period for the indicator, default is 14.
- “Style” section: Select thickness and color for the MFI indicator. The system has defaulted to fixed line values of 0 and 100 in the “Fixed minimum/maximum” section.
- “Levels” section: The MT4 platform has set default values of 20 and 80 to represent oversold and overbought areas. You can customize these values by clicking directly on them. You can also add a new value by pressing the “Add” button or delete a value by pressing the “Delete” button.
- “Style” section: This is the section to choose the color and thickness for the indicator.
Instructions for using MFI to trade with trends
After understanding the characteristics and calculation of MFI. Now let’s take a look at some effective uses of this indicator. It is used by many professional traders, as follows:
Use the MFI indicator to determine price trends
To apply this method, you can use lines 45, 50, or 55. Based on them, you can determine the trend as follows:
- The price will be in an uptrend when the MFI crosses the 50 line.
- The price will be in a downtrend when the MFI falls below the 50 line.
Even using the 45 or 55 line has the same effect as the 50 line. However, it should be noted that determining the price trend based only on MFI is often not strong enough. Therefore, to increase efficiency, you should combine this type of indicator with other indicators.
Use the MFI indicator to determine overbought or oversold areas
When MFI increases continuously and surpasses the 80 lines, this shows that the market is in the overbought zone and is likely to reverse downward. In this case, you can consider entering a Sell order.
On the contrary, when MFI decreases continuously and crosses line 20. This shows that the market is in the oversold area and is likely to reverse to the upside. At this time, you can consider entering a Buy order.
MFI trading strategy with overbought and oversold
MFI will move from the oversold area, and then cross above line 20. You can place an order when MFI has just crossed line 20. Or wait for confirmation from the bullish candlestick pattern on the price chart.
On the contrary, when MFI moves from the overbought area, then crosses below the 80 line. The most accurate order placement point is when the MFI has just crossed the 80 lines. Or you can wait for a bearish candlestick pattern to appear on the price chart. before entering the order.
Use MFI as a divergence and convergence signal to trade with the trend
Divergence occurs when the price creates a new peak that is higher than the previous peak. But MFI created a new peak lower than the previous peak. When the price creates a new higher peak the MFI does not increase accordingly. This shows that the uptrend is weakened and there is a possibility of a bearish reversal.
Convergence occurs when the price creates a new low that is lower than the previous low. MFI created a new bottom higher than the previous bottom. This is a sign of a downtrend. There is a high possibility that the market will convert into an uptrend.
See more: Exness – Trade With The World’s Leading Broker Exness
What are some notes when using MFI?
Divergence and convergence signals only tell us whether the market is likely to increase or decrease. However, they cannot determine the exact entry points. Therefore, combining with other tools such as Japanese candlestick patterns, price patterns, or other technical indicators will help you choose the most accurate entry point.
Like the CCI indicator, the MFI indicator can also give inaccurate signals. Sometimes indicates a potential investment opportunity. In fact, the price did not move as predicted, causing losses for investors. Not all divergence signals lead to price reversals.
The advice for you is to combine the use of many different indicators and technical tools to achieve high efficiency in analysis. At the same time, it helps minimize risks by not relying too much on a single indicator.
Epilogue
Hopefully, through this article by Forex Trading, you have a better understanding of the MFI indicator and how to use it effectively in trading. This will help you apply it to trading and come up with an optimal trading strategy, achieving more profits. However, remember that no indicator guarantees 100% accuracy. So you should combine it with other signals. At the same time, always set a stop loss to minimize risks and protect your investment capital.
Frequently asked questions
What is the MFI indicator?
MFI indicator is also known by the familiar name money flow indicator. It is used to measure cash flows and price movements in financial markets.
It combines price, trading volume, and cash flow to assess liquidity and buying pressure in the market. MFI is often applied to identify price reversal points or changes in price trends.
What does MFI mean?
You can conduct an MFI analysis similar to the RSI indicator. However, the biggest difference between these two indicators is that MFI uses trading volume to evaluate and guide value. While RSI is a value-led momentum indicator.
What are the signals to pay attention to when using MFI?
When using MFI, there are three basic signals we need to pay attention to. First, we need to observe the overbought and oversold levels. Second, we need to look at negative divergence and positive divergence to identify potential reversal signals. Third, we should note the times when MFI increased to level 80 and decreased to level 20 to determine whether there is a trend reversal signal or not.
