Money Flow Index Indicator
For those who may perhaps not be in the know the Money Flow Index Indicator (MFI) is a market oscillator. That integrates prices and also volume to accurately gauge buying or selling pressure. It is also known as a volume weighted RSI. Essentially the MFI usually begins with a typical price for each trading period. And money flow is deemed positive when the typical price appreciates (buying pressure) or negative when the typical price declines (selling price).
Technical traders also use a corresponding ratio of both positive as well as negative money flow which they then insert it into a RSI formula to effectually make a price oscillator that fluctuates from 0 to 100. Largely due to the fact that the money flow index indicator is tied to volume, it makes for a very efficient tool for identifying reversals and also price extremes using a range of signals.
As a volume weighted type of RSI, the MFI oscillator can be interpreted in a very similar way to the RSI. But the major contrast between the two is the fact that the latter factors in volume. Some theories have been put forward that volume “leads” prices, and as the RSI usually already “leads” prices, bringing the MFI into the mix is thought to increase this lead time.
The three basic signals that are utilized in the money flow index indicator are..
- the overbought or oversold levels, which are used to identify unsustainable price extremes.
- Bullish or bearish divergence, which are utilized to accurately predict price trends reversals.
- Finally, this money markets indicator also takes into account failure swings at either the 20 or 80 point marks.
The last of which are used to accurately determine potential price reversals. Money Flow Index Indicator might be the only indicator you will need to reliable identify price reversals.
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