The MFI, otherwise known as the Money Flow Index, measures momentum. It does this by looking at the flow of money in and out of an asset over a given period of time.
Traders often look at momentum indicators as an indicator of trend strength. These indicators can sometimes help signal when a trend is beginning or coming to an end.
Many traders are familiar with the Relative Strength Index or RSI as their go-to measure of momentum. However, the RSI only considers an asset’s price. The MFI incorporates volume into its calculation. As a result, the MFI is sometimes preferred as a more rounded measure of momentum.
Use the BTSE platform to plot the MFI.
A reading below 20 indicates ‘oversold’ conditions.
A reading above 80 indicates ‘overbought’ conditions.
The MFI can remain ‘oversold’ or ‘overbought’ for extended periods of time.
MFI divergences provide fewer false signals and can prevent over-trading.
How To Use The Money Flow Index (MFI)
Step 1: Pull up a chart on the BTSE platform:
Step 2: Click the ‘Indicators’ tab or push the ‘/’ key:
Step 3: Select ‘Money Flow Index’ from the drop-down menu:
Step 4: Admire your freshly plotted Money Flow Index:
How To Trade Using The Money Flow Index (MFI)
When the MFI is under 20 it is usually considered ‘oversold’ and over 80 is ‘overbought’.
These conditions don’t make good trade signals because the MFI can remain ‘oversold’ or ‘overbought’ for extended periods of time.
Instead, many traders will BUY when the MFI crosses from under 20 to over 20 and SELL when it crosses from over 80 to under 80.
False signals may be further minimised by combining this with a divergence strategy similar to the cherry-picked example below:
MFI moved from above 80 to below 80.
MFI appears to make a lower high while price makes a higher high (i.e. diverging).
MFI makes a lower low and initiates a sell / short signal.
In a bullish trend, the MFI rarely moves below the support zone between 30 and 40.
In a bearish trend, the MFI rarely moves above key resistance between 50 and 60.
Combining other indicators such as trendlines to determine trend direction, traders might “buy the dip” in a bullish trend when the MFI hits 30 or “short the bounce” in a bearish trend when the MFI hits 60.
For more information about determining trend direction, you can check out our Beginner’s Guide to Trendlines.
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