When you’re recent to trading…
Simply taking a look at squeaky-clean charts to execute your trades may be pretty daunting.
You’re not quite sure if the trend will proceed or if the market is about to reverse.
I totally feel you buddy.
That’s why in today’s guide, I’ll dive into the Money Flow Index so you’ll be able to trade trend continuations and trend reversals like a professional.
Here’s what you’ll discover:
- What’s the Money Flow Index in trading
- Why you must start using the Money Flow Index to level up your trading
- Avoid making these common mistakes when using the Money Flow Index
- Tips on how to use Money Flow Index so that you won’t second guess your trades ever again
Let’s start, lets?
What’s the Money Flow Index in trading
The Money Flow Index (MFI) is a sort of momentum oscillator.
Identical to other momentum oscillators, it easily gives you a way of when the costs are overbought or oversold in a specific market.
Nonetheless…
Deriving the MFI’s value isn’t as straightforward in comparison with the Moving Average.
When you’re curious, here’s the way it’s derived:
Typical Price of a period = (Close + High + Low Prices) / 3
Money Flow of a period = Typical Price of a period x Volume of a period
Money Flow Ratio = 14-period Positive Money Flow / 14-period Negative Money Flow
Money Flow Index = 100 – [100 / (1 + Money Flow Ratio)]
That’s quite a mouthful, wasn’t it?
Don’t worry.
You don’t should memorise all those mumbo-jumbo.
The important thing thing you could know is that the MFI considers the quantity data to compute its values. (More on this later.)
What does the Money Flow Index Indicator appear to be?
If you will have TradingView, here’s what the Money Flow Index looks like with default settings:
And when you look closely there are 3 parts to it:
- Overbought area above MFI 80
- Mid-point at MFI 50
- Oversold area below MFI 20
Next…
Why you must start using the Money Flow Index to level up your trading
By now you must have realised:
The Money Flow Index Indicator looks very just like the Relative Strength Index (RSI) Indicator.
When you stack each the MFI and the RSI on top of one another in TradingView…
You may hardly tell the difference.
But here’s how they differ:
- The Money Flow Index (MFI) takes under consideration each volume and price data
- Whereas the RSI only takes under consideration price data
Because of this when you’re a trader who typically includes volume in your trade evaluation, then the MFI indicator is what you’ll really like.
Then again, when you’re a trader who only likes to have a look at price but not volume, then the RSI indicator will suit you higher.
Truthfully…
None of those momentum oscillators is best than the opposite.
Either of them will get the job done.
Nonetheless, when you’re just starting out and need more conviction before taking a trade—the Money Flow Index indicator is the one for you.
Moving on…
Avoid making these common mistakes when using the Money Flow Index
Simply because the Money Flow Index takes under consideration volume and has a rather more complex way of deriving, doesn’t make it a “higher version” of the RSI.
A standard mistake that recent traders make is that they think the MFI is the holy grail because it has volume data.
They’d blindly hit buy when the MFI = 10 (oversold) and blindly hit sell when the MFI = 90 (overbought).
The thing is…
You may’t just use an indicator in insolation as your “trade signal” considering you’ll turn into consistently profitable.
You’ll need a couple of other confluent aspects before taking over the trade.
(I’ll explain more in the subsequent section.)
One other common mistake rookie traders make is that they over-read into every little peak and trough of the Money Flow Index.
Their eyes give attention to random areas of the chart and the MFI indicator, on the lookout for all styles of divergence between the worth and the MFI.
You don’t have to do this.
For the most effective risk-reward:
Just squint your eyes slightly, and give attention to the plain peaks and troughs near the oversold and overbought areas in your analyses.
Keep it easy and don’t overthink it.
Got it?
Moving on…
Tips on how to use Money Flow Index so that you won’t second guess your trades ever again
On this section…
I’ll share 3 essential techniques you should use to incorporate the Money Flow Index in your trading process:
- Using MFI mid-point for trading strong trend continuation
- Using MFI overbought or oversold areas for trading healthy trend continuation
Let’s start.
1. Using MFI mid-point for trading strong trend continuation
A market in a strong trend normally has a shallow retracement not exceeding the 20MA.
In strong bullish market conditions, it’s almost inconceivable for the Money Flow Index to achieve oversold areas at MFI lower than 20.
What you’ll be able to do as a substitute is to attend for the MFI to retest the midpoint 50, while the worth pulls back barely to form a bull flag.
Your entry trigger can then be a bullish candle close and also you’ll enter at the subsequent candle open.
You may then place your stop loss 1 ATR below the lows of the bull flag.
Next…
2. Using MFI overbought or oversold areas for trading healthy or weak trend continuation
In a healthy or weak trend, the worth normally has steep retracements back to the 50 MA and even previous resistance turned support.
In such a healthy bullish market condition, you’ll be able to often expect the Money Flow Index to achieve the oversold area at MFI lower than 20.
You may then search for a sound entry trigger reminiscent of a detailed above the previous resistance turned support or the 50 MA.
Similarly, your stop loss may be 1 ATR below the recent swing low.
Conclusion
Here’s a fast recap of what you’ve learned today:
- The Money Flow Index is a sort of momentum oscillator just like the Relative Strength Index
- The Money Flow Index takes under consideration volume and price data while the Relative Strength Index only accounts for price data
- Avoid blindly moving into positions just because the MFI is oversold or overbought
- Mix the MFI with market structure and moving averages as a part of your trade plan for high-conviction trades
Over to you now…
Have you ever used the Money Flow Index Indicator before?
How do you employ it in your personal trading?
Let me know within the comments below.