How to Use the Money Flow Index Indicator (MFI)
I will start by discussing the three types of trading signals the MFI can generate. Before using any technical indicator, I always stress the importance of understanding what indicators can tell traders about price action. Many new traders rush into using indicators without knowing how to apply them effectively. They rely on the simplest principles, which I want to note again, do not generate consistent profits. Otherwise, the retail loss rate of Forex traders would not range between 70% and 85% at most major Forex brokerages.
Here are the three types of trading signals that MFI provides:
1. Oversold and Overbought Levels: When the MFI moves below 20, traders consider the asset oversold. An overbought condition occurs with the MFI above 80. They are the most direct trading signals from the MFI but also the least reliable. Shorter time frames, for example, the M5 or M15 charts, will get more readings below 20 and above 80. The drawback remains reduced reliability. I prefer the MFI on the H1 chart, a middle ground between frequency and accuracy. Some traders wait for the MFI to break out or break down above and below 20 and 80 before entering a trend, as it may suggest the correction or sell-off is near the end, with volume flowing into the asset for a trend reversal.
Here are three examples of the MFI providing traders with oversold or overbought trading signals.
.jpg "MFI Indicator Showing Positive Divergence")
MFI Indicator Showing Positive Divergence
2. Positive and Negative Divergences: I prefer trading divergences, as they provide the most reliable trading signals in my opinion. A positive divergence appears when price action records a lower low, while the MFI, or any other indicator, sets a higher low. A negative divergence forms when price action records a higher high while the indicator sets a lower high. Positive and negative divergences receive their confirmations from failure swings, the third trading signal from the MFI.
3. Bullish and Bearish Failure Swings: While positive and negative divergences remain excellent trading signals, I recommend confirming them with bullish and bearish failure swings. You will lose out on some of the price action, but the reliability increases notably. A bullish failure swing materializes when the MFI moves below 20, then reverses above it, corrects from its peak but remains above 20, and then accelerates to a higher high. A bearish failure swing occurs after the MFI pushes above 80, drops below it before advancing but maintaining its position below 80 before plunging to a lower low.
Below is an example of a negative divergence confirmed by a bearish failure swing, followed by a sell-off in price action.
.jpg "MFI Indicator Showing Negative Divergence")
I will start by discussing the three types of trading signals the MFI can generate. Before using any technical indicator, I always stress the importance of understanding what indicators can tell traders about price action. Many new traders rush into using indicators without knowing how to apply them effectively. They rely on the simplest principles, which I want to note again, do not generate consistent profits. Otherwise, the retail loss rate of Forex traders would not range between 70% and 85% at most major Forex brokerages.
Here are the three types of trading signals that MFI provides:
1. Oversold and Overbought Levels: When the MFI moves below 20, traders consider the asset oversold. An overbought condition occurs with the MFI above 80. They are the most direct trading signals from the MFI but also the least reliable. Shorter time frames, for example, the M5 or M15 charts, will get more readings below 20 and above 80. The drawback remains reduced reliability. I prefer the MFI on the H1 chart, a middle ground between frequency and accuracy. Some traders wait for the MFI to break out or break down above and below 20 and 80 before entering a trend, as it may suggest the correction or sell-off is near the end, with volume flowing into the asset for a trend reversal.
Here are three examples of the MFI providing traders with oversold or overbought trading signals.
2. Positive and Negative Divergences: I prefer trading divergences, as they provide the most reliable trading signals in my opinion. A positive divergence appears when price action records a lower low, while the MFI, or any other indicator, sets a higher low. A negative divergence forms when price action records a higher high while the indicator sets a lower high. Positive and negative divergences receive their confirmations from failure swings, the third trading signal from the MFI.
3. Bullish and Bearish Failure Swings: While positive and negative divergences remain excellent trading signals, I recommend confirming them with bullish and bearish failure swings. You will lose out on some of the price action, but the reliability increases notably. A bullish failure swing materializes when the MFI moves below 20, then reverses above it, corrects from its peak but remains above 20, and then accelerates to a higher high. A bearish failure swing occurs after the MFI pushes above 80, drops below it before advancing but maintaining its position below 80 before plunging to a lower low.
Below is an example of a negative divergence confirmed by a bearish failure swing, followed by a sell-off in price action.
