The market is constantly fluctuating, so the use of indicators in technical analysis is inevitable. Among popular indicators, the MFI (Money Flow Index) indicator is highly appreciated because it combines both RSI and trading volume. So, what is MFI, and how to apply it in trading? Let’s find out about Forex Trading through the article below.
Overview of the MFI money flow indicator
In the foreign exchange market, the use of technical analysis tools is indispensable to make accurate trading decisions. One of the popular indicators is the MFI (Money Flow Index). Let’s learn in detail about what is MFI in the trading market to have a deeper overview of this tool.
What is MFI money flow indicator concept?
The Money Flow Index (MFI) is an important technical analysis tool in the foreign exchange market. MFI calculates based on both price and trading volume to assess buying and selling pressure. When prices increase (creating buying pressure), cash flow is positive; When it decreases (creating selling pressure), the cash flow is negative. MFI uses the ratio between positive and negative money flows, built into the RSI formula, creating a chart that ranges from 0 to 100.
As an oscillating tool related to volume. MFI is often used to identify reversal points and peaks and troughs in price charts, providing many reliable signals to traders. MFI is a technical indicator that measures the flow of money into and out of a particular asset. This index is commonly applied in gold trading strategy.
Formula to calculate MFI indicator
Different from how to calculate EBITDA, the formula for calculating the MFI indicator is:
MFI = 100 – [1000/ (1+MR)]
Or you can calculate the MFI indicator in another way as follows:
MFI = 100 x [positive cash flow / (negative cash flow + positive cash flow)]
In there:
- MR – Money Flow Ratio value
- Positive cash flow is the total value typically at higher prices in the previous period. That is, current TP > previous TP.
- Negative cash flow is the typical total value at a lower price than the previous period. That is, current TP < previous TP.
To calculate MR, follow these 3 steps:
- Determine the typical price of the TP stock code – Typical Price:
TP = (Lowest price + highest price + closing price)/3
- Determine the value of MF – Money Flow according to the formula:
MF = TP * Current volume of shares during the calculation period.
- Calculate MR according to the formula:
MR (Money Flow Ratio) = Positive Cash Flow / Negative Cash Flow
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Note when using the What is MFI index?
When using the MFI index, what should investors note:
- The volatility of MFI changes at each calculation stage, which makes MFI often relative. Because of this, MFI cannot completely reflect and accurately forecast market fluctuations and changes. Therefore, combining MFI with other technical tools is necessary to overcome this drawback.
- MFI’s price forecasting feature for specific stocks is often not highly accurate. Therefore, professional investors often rarely use this feature.
How to use the MFI indicator
The way to use the MFI indicator is to analyze and evaluate fluctuations on the price chart. As follows:
Use MFI to identify trades according to price trends
To apply this method, you can add 45, 50, or 55 moving averages to the chart. This will help you identify the trend as follows:
- When the MFI index is above the 50 line, the price trend tends to increase.
- When the MFI index is below the 50 line, the price trend tends to be down.
Using a 45 or 55 moving average can also yield the same results as using a 50 moving average. However, determining the price trend using only the MFI index is often not strong enough. To increase trading efficiency, investors should combine it with other indicators.
Application to determine negative divergence and positive divergence
What is the expression of MFI application to determine negative and positive divergence?
- When the stock price is climbing but the MFI indicator is decreasing, it shows that there is a possibility of a bearish trend reversal. This is considered a negative sign, investors should consider placing orders to sell shares.
- Conversely, when the price is falling and the MFI is rising, a bullish reversal can be expected, known as a positive divergence. In this case, investors can consider placing an order to buy shares.
The MFI indicator identifies overbought/oversold areas
What is the expression of the MFI application to determine overbought/oversold zones?
- When the MFI crosses the 80 threshold (overbought signal), this shows that the stock is showing signs of being overpriced and may decline in the future. If the MFI touches from above to below the 80 threshold, this is a sell signal, and investors should consider executing a sell order.
- Conversely, when the MFI falls below the 20 threshold (oversold signal), this shows that the stock is oversold and will likely increase in price if the selling pressure dwindles. If MFI touches from the bottom to above the 20 threshold, this is a buy signal, and investors can consider executing a buy order.
Compare MFI and RSI indicators
MFI (Money Flow Index) and RSI (Relative Strength Index) are both popular technical indicators in the technical analysis of financial markets. What are some of the differences between these two indicators MFI and RSI? See below.
What is the difference between RSI and what is MFI?
| Characteristic | MFI | RSI |
| Calculation formula | Use price and trading volume | Use price only |
| Reflect | Cash flow power | Ranges from 0 to 100 |
| Value level |
Ranges from 0 to 100 |
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| Overbought/oversold level |
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| Advantage |
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| Defect |
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| Application |
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MFI and RSI: Which is better?
Determining whether the MFI or RSI index is better depends on the specific context and goals of each investor. What are some standards to consider when evaluating the MFI and RSI?
- Market context: Each index can reflect a different part of the market. MFIs often focus on cash flows and price movements. While RSI focuses on the strength of a stock. Investors should determine which factor they pay more attention to in the trading decision-making process.
- Sensitivity: Each index can reflect market volatility differently. One index may reflect volatility more quickly while another may provide a lagging but more stable signal. Investors need to determine whether they want greater sensitivity or more stability in making trading decisions.
- Matching trading strategy: Each investor may have different trading strategies. Whichever indicator suits their specific strategy will be considered better.
In short, there is no better or worse indicator, it all depends on the specific context and trading goals of each investor.
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Conclude
In short, the MFI money flow indicator combines momentum and volume with the RSI formula, creating an exceptional tool. RSI provides bullish signals when the indicator is above 50 and bearish when below 50. MFI should be combined with other indicators and other aspects of technical analysis. For example, combining MFI and RSI with candlestick patterns can increase its effectiveness. Forex Trading hopes that the basic information of the what is MFI indicator will help investors succeed with their trading strategies.
Frequently asked questions
Can MFI be combined with other indicators?
Yes, MFI is often combined with other indicators such as RSI (Relative Strength Index), and MACD (Fundamental Analysis Indicator). Or with candlestick patterns to enhance the effectiveness of technical analysis.
Is MFI effective in all markets?
MFI is a useful technical analysis tool, but it is not always effective. MFIs may underperform in highly volatile and sideways markets.
How is MFI commonly used in technical analysis?
MFI is often used to identify overbought and oversold zones on price charts. As well as to detect potential reversal signals.
