Benefits of the Money Flow Index (MFI)
You can utilize the Money Flow Index (MFI) to help you determine the amounts of money flowing into and out of any asset of interest. The MFI has many features that are similar to the very popular and famous Relative Strength Index (RSI), but it is designed to function on volume and not price. The MFI has invented by Colin Twiggs who based its design on an earlier technical indicator created by Marc Chaikin.
Twiggs recommended that you should use the MFI to assist you in identifying the creation and terminations of trends. This indicator produces more reliable statistics when installed on trading charts exhibiting the longer time frames from the daily upwards. In addition, Twiggs advised that all observations produced using his MFI should be confirmed by utilizing another technical indicator.
If the MFI is posting higher daily volumes and they are accompanied by a climbing price action, then this is a strong indication that a new bull channel could be forming. Similarly, you can detect quality selling opportunities using the MFI if it starts issuing low volume readings that are supported by a sequence of consecutive price lows. The next diagram shows the MFI identifying both buying and selling trigger points.
Another important feature of the MFI is that it flags overbought conditions for an asset when it displays values of 80 plus.
Similarly, you should consider readings of 20 minus are indicative of oversold conditions. For instance, if you observe that the MFI has been posting readings below 20 but has just bounce back above this value; then you should consider such conditions to be a strong buying opportunity.
However, you must still take care because price could still surge downwards by hundreds of pips under such circumstance. As stated, in order to provide your equity with increased protection you are always advised to seek additional evidence supporting any MFI observation before leaping in and opening a new trade.
As the MFI readings track price very closely, many experts recommend deploying the RSI as its secondary confirmation source. If you consequently observe any discrepancies developing between these two technical indicators, then you must take heed because they could be forecasting a serious change in the price direction of the selected asset.
For example, if you notice that the RSI is posting values demonstrating that price is still rising but that the MFI has begun to fall, then this is a strong sell signal. This is because the MFI is indicating that buyer’s interest in the applicable asset is starting to recede.
The MFI produces its values by multiplying volume by the average price and then ranging the resultant using a scale between zero and one hundred. If you invest your time in understanding the key attributes of the MFI, then this indicator could significantly help you improve your trading results.