Money Flow Index indicator or MFI indicator for short is the instrument that more applies to experienced traders. It refers to the type of technical oscillators that make it possible to evaluate the money outflow and inflow. In fact, it helps to measure price movement over the given period. The tool considers both price and volume to help traders assess the pressure on the asset or market they trade in.
Years of trading experience made it clear that the volume itself does not appear to be an ultimate gauge of momentum. Traders must keep an eye on the way markets react on price movements, changes and pivots. This is where the MFI indicator is capable of confirming the momentum down or upwards. In other words, we have a tool that helps us to identify the market sentiment.
The key challenge for traders who plan to use the Money Flow Index indicator is the fact that they will need to make all calculations themselves. It is not just the point or line that will show you the ultimate price spot with the best market entry or exit position. The good news is that the calculations are pretty simple.
If you plan to use a money flow indicator, keep in mind that it is an oscillator. It displays calculations on a 0-100 scale. After you have completed all necessary calculations, you will get a figure that is plotted on the scale to help you identify the market oversold and overbought signals.
Reading the MFI indicator does not require special techniques or advanced knowledge. All you need is to keep in mind the following:
Now, let's see how we can use the Forex Money Flow Index indicator to measure the money inflow and outflow.
In theory, the MFI indicator works the following way: the above-mentioned levels and lines show that that price is about to reverse. Traders get ready to open a position and benefit from the momentum. But in real life, the situation is a bit more complicated.
The asset price and the MFI index itself can sometimes provide contradictory signals. This is what traders call a divergence. Imagine a price to make a new high while the indicator fails to reach a relevant level providing bearish divergence. Traders are sure a selling pressure is about to occur, but the price falls down instead with the MFI indicator's inability to follow that movement. As a result, we can observe a bullish divergence.
What's more, a divergence of any kind does not always mean price reversal. As we have stated earlier, the instrument may come up with false signals. In other words, a trader identifies a perfect trading opportunity while the price starts moving unexpectedly in another direction. This is where an effective risk management strategy will help you to prevent inevitable losses.
The money flow indicator calculation process involves several baseline stages.
The trading platform does not have the tool on default. The good news is that you can easily download the MFI indicator for MT4 and have it installed with a couple of clicks. The procedure is the same as for any other technical oscillators used to meet your personal trading style.
The next stage is to integrate the indicator with the trading platform and have it installed in several easy steps:
Now you can use the MFI indicator for MT4. If you do everything right, it will be available on the trading charts.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.