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Professional traders believe that the indicator MFI (Money Flow Index) is in the top ten of the most popular technical analysis tools. This statement is based on the fact that the MFI by its very nature is quite revealing in the calculation of cash flow invested in a given asset. How useful this indicator for Forex — we are with you today and we will understand, after tests of different options for its use.
the Characteristics of the indicator
Currency pairs: any
trading Time: around the clock
Recommended brokers: Alpari, RoboForex, Amarkets
Indicator the Money Flow Index (Money Flow Index, MFI) shows the intensity with which money is invested into a security and then withdrawn from it. MFI is very similar to the working principle and the calculation of the RSI, only it additionally takes into account the volume. In fact, this indicator measures the pressure of buyers and sellers. MFI is based in the basement of the graph and ranges from 0 to 100:
you can Find that indicator in your MT4: Insert>Indicators>Volume>Money Flow Index. In our forum you can pick out the taste of a custom indicator from a large set, kindly created by members Pavel888.
Have modified the indicator is usually only one setting — the period of averaging, which, as a rule, is set the same as the RSI – 14.
how it works
the MFI, which considers the difference between incoming and outgoing cash flows. If the underlying asset value is below this difference, it means that an increase in incoming money and the bull market. If we see the opposite, it means that investors are leaving the instrument and the market is bearish.
Thus, the MFI compares the ratio of positive and negative cash flows. If the typical price for the current period is higher than for the previous one — this demonstrates the positive flow of money into the asset. If the typical price for the current period is less than the previous one, so investors withdraw funds from the asset.
As with the RSI, levels of support and resistance have on the levels of 30 and 70 or 20 and 80. The recommended period of the indicator is 14, but you can choose the best option yourself.
Money Flow Index uses in the calculation the concept of the typical price (Typical price) — private from division of the sum maximum, minimum and closing price of 3. The basic concept in the calculation of the Money Flow Index will be the Money Flow (cash flow), which is determined by the product of the typical prices of a single period the trading volume for the period.
Money Flow(i) = Tp(i)*Volume(i),
where the Money Flow(i) is the cash flow for the period,
Tp(i) — the typical price for the period
Volume(i) — trading volume for the period.
the Next step is the classification of current cash flow or positive (Positive Money Flow) or negative cash flow (Negative Money Flow). If the current typical price is higher than previous, then Money Flow is positive, if less, negative.
In this step, calculate the cash ratio (Money Ratio) as the quotient of the sum of positive money flows for the specified period in the amount of negative cash flow over the same period.
Money Ratio = ∑(Positive Money Flow(i))/∑(Negative Money Flow(i)).
And the last step is to compute directly the Money Flow Index as the difference between the 100 and the private from dividing 100 by the sum of 1 and a cash economy.
Money Flow Index = 100 – (100/(1+Money Ratio).
it Should be noted that the Money Flow Index is not in the calculation of the model averaging and the choice of period is only a temporary cut, which highlighted the positive and negative cash flows for their further comparison. Consequently, the Money Flow Index is in sync with the price, and in some cases even more dominant.
Using Money Flow Index to trade
Well, now to the fun question on how to use this indicator in trading? Because MFI is very similar to RSI, he gives three types of signals. These include the exit from the overbought/oversold, divergence and formation of shapes.
since the Money Flow Index is a typical oscillator, the most common signal will still be output line of the indicator from the overbought/oversold. And, when it starts to trend, Money Flow Index, like all other oscillators, can permanently be stuck in that zone. Therefore, the indicator needs a trend filter.
the Traditional territory of the strong starts above 80 and oversold territory starts below 20. However, these values are subjective, and you definitely can install any thresholds that are best suited for this tool.
the intersection of the median lines
If you put on the chart MFI direct at 50%, you can use the intersection as an additional confirmatory signal.
the Intersection of this level upwards tells about the growing pressure from buyers and is a buy signal. The cross-down shows that are gaining strength sellers and the priority is now for sale.
MFI Divergence occurs when there is a difference between what points the price action, and that indicates MFI. These differences can be interpreted as an impending reversal. In particular, there are two types of divergences: bullish and one bearish.
About divergence on our site there is a lot of information (use the search in the upper right corner), so to repeat it here makes no sense. It's fairly powerful and accurate signals for any oscillator.
is Sometimes used trading method in which the indicator chart tracked the levels of support and resistance, trends and figures of technical analysis, like double tops or head and shoulders. Especially reliable signals can be considered those that appear simultaneously on the chart and on the chart. This method of trading is quite specific because much depends on the subjective view of the trader and his interpretation of what is happening. I can only say that to find good shape on the chart MFI is quite difficult.
I decide to try practicing simple indicator signals, supplied in crossing the levels of overbought and oversold as well as level 50. I took one currency pair EURUSD on the D1 timeframe and more variations of the signal. In this case I used different trailing stops, ATR stop and closure according to various signals from other indicators. All options for the release and support positions were optimized once when using the login option on another indicator, to exclude the adjustment of parameters under the specifics of the MFI. Then with these settings I ran some tests without changing the parameters of the indicator.
Option 1 – buy, if RSI(7) crosses level 30 from the bottom up, and selling when crossing the 70 level from the top down:
Option 2 – reverse the first option is:
Option 3 – MFI is increasing for shopping and falls for sales:
Option 4 – more than 50 MFI for shopping and less than 50 for sales:
Option 5 MFI grows above 50 for purchases, and falling below 50 for sales:
Option 6 – reverse option (like option 2), but with a period of MFI 21:
the Only normal use of the overbought/oversold indicator MFI — crossing the overbought indicator from the top down to sales and the oversold level from below upwards for purchases, which was to be expected.
Indicator Money Flow Index — this kind of variation of RSI taking into account the trading volume. Hence derive the properties of this indicator. Because the value is difficult to overestimate for the analysis of asset Money Flow Index is more preferable for analysis than RSI.
the Price of a financial instrument and its correlation with momentum is a very important factor for any technical analyst. The money flow index can be a valuable tool. Of course, the MFI should not be used as the sole source for signals as any other indicator. Since this oscillator, it is logical to use it to define a specific entry point, wherein determining the current trend one of trend indicators.
best regards, Dmitry aka Silentspec
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