MFI indicator for cash flow strength analysis
Today we will talk about an indicator that is present in the standard list of MT4 analysis tools. It is rarely used by traders. I don’t know why MFI indicator is not very popular in trading. In my opinion, this indicator can be very useful in trading. Its algorithm is very similar to the RSI indicator. However, there is one significant advantage. Money Flow Index takes into account the volumes in its calculations. In essence, it analyzes the cash flow that enters or leaves the market. Based on this, it determines the strength of the trend movement. Indicator values can range from 0 to 100. The default period is 14. This means that all calculations are made on the basis of the last 14 candlesticks. Of course, you can also set any other value. But we should take into account the fact that the less this parameter is, the lower the quality of signals will be . And now let’s move on to the question of practical application of the indicator.
Opening trading positions by MFI indicator
We have two options for opening trade orders by MFI.
The first one that is most effective is the divergence. Let’s take an example:
The price of the currency pair has updated the minimum. And the indicator did not do this, which indicates a possible reversal of the direction of movement. In this case, from descending to ascending. Which means you can consider shopping.
And the second variant of MFI application is its use for opening trade orders based on market conditions called overbought or oversold. These zones are separated in the indicator field by 80 and 20.
If the indicator line breaks through the 80 level and is in an overbought zone, it means that the bullish forces are likely to be running out. You can expect a trend reversal and open sell deals. By analogy, if the indicator line breaks through the level 20 on the downward movement and is in the zone that indicates oversold, it means that the forces of the “bears” have weakened. There is a high probability of a trend reversal. You can think of opening buy.
The best trading result can be obtained by using the MFI indicator with a filter. You can choose the optimal indicator for this purpose by testing various variants on a demo account. And don’t forget the risks. You should always keep them under control.