Money Flow Index Strategy
The Money Flow index Strategy is a trading oscillator that was originally designed for the stock markets and other centralized trading instrument and is unique to other indicators/oscillators as it combines both volume and price. The MFI is often referred to as a volume weighted RSI and is used to measure buying and selling pressure. It is also used to determine the current state of the trend, meaning whether the trend is sustainable or whether a correction is due for a correction. As with all oscillators, the MFI oscillates between 80 and 20 signaling over bought and over sold conditions.
When applied to the forex markets the MFI oscillator doesn’t really offer any major benefits over the RSI due to the fact that forex is not centralized but is traded over the counter. However, the MFI oscillator can be used to trade the same way as one would trade using the RSI oscillator.
Trading with the Money Flow Index oscillator is not suitable for beginners as it requires traders to combine various elements. The best results can be derived when applying the MFI oscillator to a trend indicator such as a moving average.
The chart below shows the MFI oscillator plotted alongside the 50 period moving averages. The vertical lines marked by the arrows denote the short term correction in prices in relation to the trend signaled by the MFI oscillator.
Money Flow Index Strategy
How to trade the Money Flow Index Strategy
The Money Flow Index can be used to trade in two ways.
- Using reversals off 80/20 levels to buy and sell in relation to the trend
- Using Money Flow Index divergence in prices
Money Flow Index Reversal off 80/20 Levels
To trade the MFI using the 80/20 levels, use a 50 period moving average on a daily chart or the appropriate moving average on a time frame of your choice. Add the MFI oscillator with the default 14 period setting. Buy signals are taken when the MFI rises from below 20 and price closes above the moving average. Stops are placed at the recent low and the trade can be closed when the MFI falls from above the 80 level.
Similarly, sell signals are taken when the MFI falls from above 80 level and price is either below or closes below the moving average. Stops are set to the recent high and profits are booked when the MFI falls below 20 and rises back. The chart below illustrates the buy/sell signals using the MFI’s 80/20 strategy.
Money Flow Index Reversal Strategy
Using Money Flow Index Divergence Strategy
The MFI oscillator can be also be used to trade using divergences. The chart below shows the bullish and bearish divergences that are formed using the MFI oscillator and the buy/sell signals are taken accordingly.
Long positions can be taken when a bullish divergence is formed on the MFI with stops placed at the low and likewise, short positions can be taken when a bearish divergence is formed on the MFI with stops placed at the high.
Money Flow Index Divergence Strategy
Money Flow Index Strategy – Conclusion
The Money Flow Index oscillator offers traders many ways to trade the markets and the oscillator can be combined to a trend following strategy. Divergences are more easily spotted on the MFI as it also takes into account the volume which plays an important role. While the setups are easy to spot, traders need to have enough practice in terms of spotting the divergences before they are able to trade with the MFI oscillator more effectively.
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