Money flow index: how to use it in trading

One of the critical trading tools is the Money flow index (MFI). It gives the trader access to helpful information needed to make the right decisions. This indicator is as simple as possible, practical, and versatile. However, to benefit from it, you must learn how to apply it correctly in trading.

General information

Before using MFI, you need to study all the information about this index. It is one of the oscillators that help traders identify turning points in price movements. This indicator demonstrates the intensity of investing in trading assets and withdrawing money from them.

The money flow index is ideal for stock trading. It takes into account negative and positive financial flows that reflect the activity of users in the matter of buying or selling securities. Negative readings indicate the desire of most traders to get rid of traded shares, while positive readings indicate the desire to acquire assets. MFI compares both financial flows and analyzes the intensity of further price movements based on the data obtained.

Pros and cons

MFI is a primary indicator used by experienced and novice traders. Such popularity is due to many advantages and a minimum number of disadvantages.

Key benefits:

• suitable for trading various assets;
• efficiency in short-term and long-term transactions;
• does not require the use of additional trading instruments;
• high signal accuracy;
• sensitivity to any changes in the market;
• allows you to determine the price reversal points;
• ease of analysis of output data;
• suitable for beginners and professionals.

Main disadvantages:

• periodic appearance of false signals;
• lack of timeframe settings.

Setting

The money flow index is a primary indicator in almost all trading terminals that are popular with traders. This indicator is placed in a separate window, while its analogs are superimposed on the price chart. This feature simplifies the process of setting up MFI as much as possible; even a novice user can handle this work.

To make it comfortable for a trader to work with the indicator, you need to make some changes to the settings. So, to simplify the analysis, the best option would be to use a period of 14 candles. This number is manually entered into the corresponding field (located in the "Parameters" section). It indicates the period during which plus and minus financial flows will be calculated.

In addition to the period, the trader can set the optimal value of the fixed minimum and maximum in the settings. By default, these parameters are 0 and 100. However, experts recommend specifying 20 in the minimum and 80 in the maximum. It is these levels that are most significant for analysis. If you leave the values ​​0 and 100, the indicator's sensitivity to price fluctuations will decrease, leading to a decrease in the number of received signals. Some traders prefer to set a fixed maximum of less than 80. In this case, the sensitivity will increase, and the user will receive more tips. However, among them, there will be quite a lot of false signals, because of which the trader will need to conduct additional analysis. This will take some time and require the user to acquire other knowledge. In this regard, setting values ​​​​less than 80 is advisable only for professionals in their field.

Use in trading

The money flow index is as easy to use as possible. Thanks to this, even inexperienced traders can learn to interpret the received signals correctly. To understand all the secrets in more detail, you need to consider the most popular trading options and the data provided by the indicator.

MFI has a scale of 0-100. Each value corresponds to a particular situation on the market. Therefore, it allows the user to receive much helpful information.

Options for interpreting different meanings:

1. From 1 to 20. Such index values ​​are not uncommon. They show that the traded asset is oversold and the minimum number of transactions is made. All of the above means that shortly stocks or other securities will attract the attention of buyers. This will automatically increase the number of transactions made and gradually increase the value of assets. This trend will be a signal to buy securities.
2. From 20 to 80. Index values ​​in this range should not be ignored either. They can give the trader important information about the current state of the market. The critical point of this range is 50. If the price chart crosses it and continues to move down, this indicates an increase in demand. Buyers begin to buy assets gradually; in the future, the price chart will inevitably cross the 20 mark. If, after passing the 50 mark, there is a rise in the line, this indicates an increase in the activity of sellers. Most often, after this, the price chart moves through point 80
3. From 80 to 100. The traded shares are overbought if the index values ​​are within these limits. This indicates that the price has reached its peak, and shortly, traders will start selling assets en masse. All this will lead to a sharp increase in the number of transactions, and the value of securities will decrease. This trend will be a signal for the sale of existing assets.

A popular and widely used indicator is the Money flow index. It helps the trader make the right decisions timely, avoiding significant financial losses and making good profits. At the same time, trading with MFI has several features. If you know them in advance, you can increase the effectiveness of the trading tool and get the maximum benefit from its use.