The Money Flow Index (MFI) indicator is an oscillator designed to compare the cash flows in an asset over a certain period of time. MFI is often compared to the Relative Strength Index (RSI), but unlike RSI, the Money Flow Index takes into account not only price changes but also trading volumes.
How does the indicator work?
For each period, the average price is calculated relative to the highs and lows. If the current average price is higher than the previous one, the money flow is considered positive. If the current average price is lower than the previous one, the money flow is considered negative, accordingly.
How to use it in trading?
The indicator has overbought and oversold levels at 20 and 80, respectively. If the MFI reaches high values, it may indicate overbought conditions, which could be a signal for a bot to open a short position. Conversely, a decline in MFI to low values may indicate oversold conditions in the asset, which could be a signal for a possible price recovery.
Since the Money Flow Index (MFI) is a typical oscillator, when the market begins to trend, the MFI, like other oscillators, may get “stuck” in the corresponding overbought or oversold zone. Therefore, it is recommended to use the indicator during sideways markets or in relation to the trend. However, in the presence of a trend, values of 70 and 30 may be more convenient for determining overbought and oversold zones, as the price may not reach levels of 80 or 20 during corrections.