Money Flow Index (MFI)
By publishing detailed reviews of oscillators of binary options for readers, we give you an opportunity to learn how to trade. Every newcomer of option trading makes his or her first steps in trading, studying materials on technical indicators, effective strategies and other tools. By collecting useful information on our web resource, we do our best to make your training in trading efficient. Today’s article is solely devoted to the MFI indicator.
The Money Flow Index (MFI) appears to be a technical indicator of the speed of the price movement. It’s somewhat similar to the Index of Relative Strength (RSI). Its difference from RSI is that the volume index is taken into account in the calculations. The trader Bill Williams is the creator of the indicator. He illustrated his new tool in the book “Trading chaos”. Creating the oscillator, he drew attention to the tick volume as a crucial indicator of market expectation, closely connected with the price movement.
The volume indicator has to do with new orders arriving on the market, which change the rate of movement. To put that another way, new players are entering the market, increasing the number of transactions, which shows a change in the tick volume. Thus an increase or decrease in the existing dynamics takes place.
The main advantage of the MFI is that it’s an effective tool, which provides trustworthy measuring of the strength of cash flows invested in an asset (for example, investment in a currency or a security). The cash flow index compares the positive and negative cash flows, getting an indicator that, in comparison with the price data, determines the strength of the trend. Like the RSI, the MFI takes values from 0 to 100, and it’s calculated using 14 candles.
If you’re eager to see how the MFI indicator looks on the MetaTrader 4 platform (mt4), take a look at the image below. Moreover, you can download the platform Metatrader 4 and get acquainted with the oscillator in practice.
What is the key principle of the MFI indicator?
The MFI works by the principle of comparing indicators of positive and negative cash flows of the market. If the price indicator for a particular period is higher, it stands for a positive inflow of funds into the asset. If the price indicator for a period is less, it shows that investors withdraw funds from this asset.
Tracking the price dynamics of the asset and showing information about whether trading volume is rising or falling, the MFI signals the strength of the trend to justify bidding with it, determine the beginning of a new trend or the moments when it’s better to avoid trading. It’s especially valuable in option trading because it enables traders to make high-quality forecasts of entries to the market.
The indicator happens to be is an index of the intensity of investments in financial instruments. It analyzes the price dynamics on the basis of positive and negative cash flows, and, having compared with the price, takes a value from 0 to 100, which reflects the strength of a particular trend.
When working with the Money Flow Index, one needs to consider:
- Data on the discrepancy between the indicator and the movement of prices. If prices rise, while the value of the Money Flow Index goes down (or vice versa), a price reversal is probable;
- The Money Flow Index readings above 80 and below 20 indicate the potential top and bottom of the market.
- The MFI works well on all timeframes – from five-minute to weekly charts.
The calculation formula of the MFI:
MFI = 100 – (100 / (1 + MR), where:
HIGH – the maximum price of the current bar;
LOW – the minimum price of the current bar;
CLOSE – the closing price of the current bar;
VOLUME – the volume of the current bar.
The MFI indicator signals
Divergence and convergence are phenomena of divergence in the direction of the movement of the price chart and the movement of the indicator. They warn market participants about the rapid turn of the market. Divergences and convergences between asset prices and the MFI are used as signals to buy or sell. As with other oscillators (for example, the MACD, Momentum, Stochastic, etc.), close turning points of the current trend are often shown.
- With a divergence signal that shows up in an upward trend, you should buy CALL options;
- With a convergence signal, which shows up in a downward trend, you require buying PUT options.
The MFI is utilized to define overbought-oversold zones.
- The asset is overbought when the MFI reaches 80 and exceeds it. A signal is generated for the sale of the PUT option.
- The oversold level is below the level of 20 points. It’s a signal for the purchase of the CALL option.
When oversold is reached, the market might reverse.
Do you need to install the MFI on your platform?
The MFI happens to be a classic tool for analyzing the market situation. It can be found in nearly all modern trading platforms, and it’s also available in Metatrader 4.
In order to add an oscillator to the price chart, follow these steps:
- Click the “Insert” tab in the top menu of the platform.
- Select the “Indicators” – “Volume” tab
- In the drop-down menu, which opens, choose “Money Flow Index”. The indicator has been added to the chart, so you can work.
When installing the Money Flow Index, you can utilize the setting of the value period, the default value of which accounts for 14. This value is chosen by the trader for himself, based on the strategy of work. If the Money Flow Index period is reduced, the volatility of the indicator will edge up.
If your platform does not have this indicator, you can download it here.
The use of the indicator for binary options
The Bill Williams Cash Flow Index is a very interesting indicator, which can be used in option trading. First of all, it deserves attention, because it is built by volume. It’s often considered to be more serious and useful in option trading than the RSI.
Financial markets work in the following way: the dynamics of prices are closely connected with the flow of funds. The greater this flow is, the stronger the dynamics. However, in reality it’s more and more difficult, and it’s a daunting task to determine the dynamics. Fortunately, the task was greatly simplified with the advent of the Cash Flow Index, capable of determining the direction of the movement of money. By the way, it’s worth remembering that the MFI works with teak volumes, since it’s nearly unreal to determine the actual effective volumes of options.
Among the key advantages of the indicator: it’s similar to the RSI, but, in addition to the price index, it also takes into account trading activity (tick volume), which increases the overall quality of signals; it is easy to configure (you only need to specify the period parameter); the charts are consistent, you can see the statistics of the data and assess the risks.
The indicator is widely used in binary option trading. Just like the RSI, it provides high quality signals of divergence and convergence, as well as overbought-oversold. It is worth remembering that the divergence between the price indicator and the MFI can be observed for a long time and the market might not reverse. Therefore, you need to carefully study the behavior of the indicator.
One of the main advantages of MFI is its stability. Like other indicators, it’s recommended to use it in combination with other technical analysis tools to confirm the data.
Transaction rules (screenshots)
Trading with a signal of overbought-oversold
The MFI points out to overbought-oversold zones. The asset is overbought when the MFI reaches 80 and exceeds it. You can place a PUT (down) option. In the image below you can observe the upward trend of the market on the platform Metatrader 4. This upward trend signals an early reversal of the market:
Use the opportunities of an uptrend in the price and place a PUT (down) option at a trusted Finmax broker. To do this, go to the broker finmaxbo.com website and prepare the option parameters, specifying the following parameters:
3.The amount of the transaction
4.Forecast of the price movement: DOWN
5.Click the “buy” button and wait for the results
When the MFI’s oversold level is below the 20-point level, you can buy the CALL option (up). In the image below, you can observe the downward trend of the market on the Metatrader 4 platform. This downward trend signals an early reversal of the market in another direction:
Use the opportunities of the downward trend in the price and place the CALL (up) option at the reliable Finmax broker. To do this, go to the broker finmaxbo.com website and prepare the option parameters, specifying the following parameters:
3.The amount of the bet
4.Forecast of the price movement: UP
5.Click the “buy” button and wait for the results
Trading with a signal of divergence
Divergence shows up on an upward trend, when the price goes to one side, and the indicator lines to the other, which signals an early change of the trend. The image below shows the divergence signal on the Metatrader 4 platform (you can buy the CALL option on the Finmax broker’s website, the instruction is listed above):
Trading in convergence
Convergence occurs on a downtrend, when the price on the chart sets new peaks, while the indicator does not, which points to a change of the trend. The image below shows the convergence signal on the MetaTrader 4 platform (you can buy the PUT option on the Finmax broker’s website, the instruction is listed above):
Those concerned with getting a stable income start using the principles of money management in their daily trading. However, even if you are a newcomer in option trading, it doesn’t mean that you are too green to think about money management. You really need it. The earlier you start using its principles in practice, the better your results will be.
Money management happens to be an effective strategy of account and personal finance management, capable of solving such issues as correct work with a personal account, how to save and increase funds on it. The basic rules of money management are designed to make trading profitable:
Trade with a minimum of funds: it is recommended to spend minimum amount of money on trade; put on the option about 5% of the amount of your deposit; work with options, the price of which is less than the funds on deposit; work with a reliable broker that will guarantee you the best results and profits. Follow these recommendations and you will save money on the deposit.
Transfer a minimum of funds to deposit: it is recommended to work with a minimum of funds on the account; Do not put the entire deposit on the option, because the money can still come in handy in order to recoup; you’d better organize work with a deposit more practically: allocate an unlimited limit, which you can freely implement and then do not go beyond it. Follow these recommendations and you will easily save your capital.
Trade with a minimum of assets: it is recommended, when working with options, to gradually complicate your work; start trading with 2-3 assets and then, once you feel more confident, you can increase the number of tradable assets. With this approach, you will be able to keep the situation under control, and monitor the state of the account. Follow these recommendations, and you will be able to easily organize effective work from the first steps in trading.
Trade without emotion: when starting trading options, it’s recommended to learn how to properly set yourself to work. Remember that the mindset here matters a lot – it determines the entire success of the trade. Excessive emotions will interfere with concentrating and drawing the right conclusions. When trading, get ready for a serious job, because at that moment you need analytics and rational solutions for a positive outcome. Follow these recommendations, and you will easily build up a conscious attitude to trading.
Like the principles of money management, it’s also one of the leading concepts in trading. Expiration is the moment when the option expires, when traders learn the results of their forecasts and understand whether the funds will be replenished on the deposit. Expiration directly affects the overall effectiveness of your trading. If you want the trade to bring you a stable income, wisely work with expiration.
Types of options:
- Ultra-short options (express) – 60 seconds – 5 minutes.
- Short-term options – 15 minutes – several hours.
- Medium-term options – from 6 hours – 24 hours.
- Long-term options – a day – a few months.
Is it possible to extend options’ expiration?
You can extend the expiration if during the trade you realize that you have chosen the wrong forecasts. However, not every broker allows clients to prolong expiration, keep this in mind.
If you are a beginner in binary options, first use a long expiration to minimizes the risks of this expiration.
If you are a professional in option trading, with decent trading experience, use the expiration that is convenient for you. Choose brokers, which will allow an increase in expiration during trading, which will minimize the loss of funds with an incorrect forecast.
If you want to get a quick income, use a short-term (a few hours) expiration, which will give you a quick earning in a minute. Remember that express expirations are always unpredictable.
If you want a stable income, use the opportunities of the long-term expiration, which will bring you a decent stable income.
Expiration in strategies with the MFI
The strategy for overbought-oversold signals
Short-term trading: It’s allowed, it is difficult to understand the dynamics of the market; expiration is characterized by risk and unpredictability.
Recommended expiration: From 1 hour to several hours; you will be able to analyze the situation on the market, determine the existing forces, see the development of the trend and the signals of entering the market.
Long-term expiration: It’s also recommended; it will give you good signals of entering the market that will bring you a good income.
The strategy for signals of divergence and convergence
Short-term trading: It’s allowed, due to the high degree of risk it can lead to losses, so when making a decision, be careful.
Recommended expiration: It lasts from 1 hour to several hours; it will not only provide data on trend dynamics, but also enable you to analyze the situation on the market, determine the existing forces, and see the trustworthy signals of entering the market.
Expiration for more than an hour: It’s also recommended, it will allow you to analyze the dynamics of the market, to anticipate the outcome of trading based on macroeconomic analysis (news, economics, etc.).
Expiration in the scalping strategy «Bollinger bands + MFI»
It’s an interesting scalping strategy, potentially capable of bringing you a good income. To make use of it you will require the indicators Bollinger bands (as the main signal to enter the market) and the MFI (as an additional signal).
Buying signal: when the price touches or breaks the lower Bollinger band, and the MFI is in the oversold zone (below level 20), it is necessary to wait for the formation of a bullish candle. We enter the market at the opening of the next candle (after the bullish one). The sell signal: when the price touches or breaks the upper Bollinger band, and the MFI is located in the overbought zone (above level 80), it is necessary to wait for the formation of a bearish candle. We enter the market at the opening of the next candle (after the bearish one).
Short-term trade: It’s recommended; since it’s a scalping strategy, trading takes place with this expiration; it enables you to get high quality signals, participate in a large number of transactions and get a decent income.
Daily expiration: It’s not recommended; it’s a scalping strategy, focused on express-expiration, so in this case long terms won’t bring good results.
Long-term expiration: It’s not recommended too; it’s also a scalping strategy focused on express- expiration, long-term expirations won’t bring a good result, it is difficult to follow the signal for a week, for example.
Expiration in the scalping strategy «MA + MFI»
That’s another interesting scalping strategy, characterized by high profitability. To make the most of it you require the following indicators: a simple moving average (3 SMA) and the MFI. To use this strategy is simple: you should enter the market when the MFI crosses the moving average.
The signal for purchase: The MFI crosses from below-up (below 30) moving average 3 (SMA). You need to enter the market at the opening of the next candle. The sell signal: The MFI crosses from above-down (above 70) the moving average 3 (SMA). You need to enter the market at the opening of the next candle.
Short-term trade: It’s recommended; since it’s a scalping strategy, the work takes place with this expiration; it allows you to get high quality signals, participate in a large number of transactions and get a decent income.
Daily expiration: It’s not recommended; it’s a scalping strategy, focused on express expiration, so long terms won’t bring good results in this case.
Long-term expiration: It’s not recommended too; it’s a scalping strategy focused on express expiration, so long-term expirations won’t bring a good result, it is difficult to follow the signal for a week, for instance.
Expiration in the scalping strategy «MA + Volume + MFI»
In this strategy, you can use SMA signals and also see the money supply and the price. A simple moving average (SMA) is one of the most effective technical analysis tools that determine the trend direction as well as the entry point to the market. To make use of it, you will need the following indicators: the 2 SMA indicators with periods of 5 and 14; the Money Flow Index; the Volume.
The signal for purchase: a downward trend is turning into an upward trend, the 5 SMA crosses the 14 SMA from the bottom-up; at the time of the SMA crossing, the MFI is above level 50, or crosses it from the bottom-up; the Volume signals the build-up of the tick volume compared to the previous candle. The sell signal: the upward trend is transforming into a downward trend, the 5 SMA crosses the 14 SMA from top to bottom; at the time of the SMA crossing, the MFI is above level 50 or crosses it from top to bottom; the Volume signals the build-up of the tick volume compared to the previous candle.
Short-term trading: It’s not recommended because due to high risk it can lead to losses.
Recommended expiration: from 1 hour to several hours; day trading will be more favorable; a smaller amount of market noise will enable to observe good signals of trends.
Long-term expiration: It’s not recommended too, because it’s quite difficult to observe the development of the trend and track high quality.
To check in practice all the expiration possibilities, use the convenient platform of the proven Finmax broker. To do this, you need to go to finmaxbo.com. As for the advantages of the platform one should mention that it’s a modern platform, which meets all modern trading requirements, ensures the choice of expiration from 30 seconds and up to six months, boasts the comfort of work on the website and in the personal cabinet, and also offers an extended set of tools for traders.
Platform Metatrader 4 (mt4) – download.