Pathshala: Money Flow Index

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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Definition of the Money Flow Index Indicator</b></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The Money Flow Index is an indicator that utilizes 
the volume and volatility of an asset to determine the buying or selling
 pressure of an asset. The indicator was developed by Avrum Soudack and 
Gene Quong as a volume-weighted variation of the RSI.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The Money Flow Index is calibrated from 0 to 100, and
 creates a money flow ratio (Positive Money Flow to Negative Money Flow)
 over a time period. This money flow ratio is what is pushed into an RSI
 formula to create a momentum indicator. Being a momentum indicator, the
 Money Flow Index (MFI) is capable evaluating overbought and oversold 
market conditions, using values of 80 and above for overbought 
conditions and 20 and below for oversold situations.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Money flow is deemed to be positive when there is 
increased buying pressure, leading to rise in price of currency pair. 
Money flow is negative when there is increased selling pressure, leading
 to drop in price of currency pair.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">MFI can also be used for divergence trades, as divergence between peaks and troughs of the MFI and the price action can produce trading signals.</span></div>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Components of the Money Flow Index</b></span><br />
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The Money Flow Index is made up of three components.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">a) The indicator line which is a measure of price and volume weighting set to 14 periods.<br />
b) Overbought zone<br />
c) Oversold zone</span></div>
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The calculation of the Money Flow Index is by multiplying the typical price by the volume:</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Typical Price = (High + Low + Close) / 3<br />
MFI = Typical Price X Volume</b></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Usage of Indicator</b></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The Money Flow Index shares resemblance to the 
Relative Strength Index, so it can be used in the ways the RSI is used. 
More importantly, it also incorporates the volume of trade by buyers and
 sellers into the calculation, so it is capable of producing trading 
signals much earlier than the RSI can.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Usage of the Money Flow Index in Trading</b></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The Money Flow Index can be used in trading in the following ways:</span></div>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>a)As a standalone indicator</b></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As a standalone indicator, the Money Flow Index can 
be used in divergence trades. The divergence in this case would be to 
look to see where the peaks and troughs of price action deviate from the
 peaks and troughs of the Money Flow Index. Trend lines are used to 
connect the peaks and troughs of both price action and the MFI. Whenever
 a divergence is detected, it represents a trading opportunity as price 
action will try to correct the divergence. The divergence situation is 
seen when the trend lines of price and the RSI are facing different 
directions. The entry for any divergence trade must be made using 
technical parameters such as candlestick or chart patterns.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrp5AB7-ADmQOsXPEkqAieL56Hj_puauz-hcWYc1-gz7Wpy-n6FMl7L2T20mpWhgoGSvUAvp_wCaj7HQHDMELvOosunD86H7bV0klv5OjOA9t4rO2dl8SmEZc0xYiVSRQv8lDhENmQ8QI/s1600/MFI_divergence.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="261" data-original-width="505" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrp5AB7-ADmQOsXPEkqAieL56Hj_puauz-hcWYc1-gz7Wpy-n6FMl7L2T20mpWhgoGSvUAvp_wCaj7HQHDMELvOosunD86H7bV0klv5OjOA9t4rO2dl8SmEZc0xYiVSRQv8lDhENmQ8QI/s1600/MFI_divergence.png" /></a></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The example above shows a typical divergence trade. 
The MFI is showing higher lows while the price action is making lower 
lows. This is a bullish divergence and price is expected to correct 
upwards to tally with the MFI. After identifying the divergence, the 
trade is setup after we identify a pinbar entry candle. The exit point 
of this trade is when price gets to levels identified by the MFI as 
being in overbought areas. Note that the divergence trade was setup when
 price was oversold, so this was a good trade on the 4hour chart of the 
GBPJPY, netting 356 pips.</span></div>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>b)In combination with other indicators</b></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The primary way is to trade the MFI in combination 
with other indicators is when trading overbought or oversold market 
conditions. When the MFI is 80 or >80, the market is overbought and 
this is a bearish signal. When the RSI is 20 or <20, this is an 
oversold signal and the trader would be looking to short the currency 
pair.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Here, you could add the coloured MACD indicator
 and look for something on the charts that would support a short entry 
when the MFI is overbought, or a long entry when the MFI is oversold.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHP35BTQIEEhyKlloaqSlq3aDi3yfEqDmpKpt-LuXn-O65748uqNKn71X8KGGTKRxW2pYs_zUnxSbqgyWkEvCzNOdqDpTLTVkSUClO68LnAqs1uk9mqN6zdtNFZBARjxuxTepeXx0y308/s1600/MFI_short.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="283" data-original-width="514" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHP35BTQIEEhyKlloaqSlq3aDi3yfEqDmpKpt-LuXn-O65748uqNKn71X8KGGTKRxW2pYs_zUnxSbqgyWkEvCzNOdqDpTLTVkSUClO68LnAqs1uk9mqN6zdtNFZBARjxuxTepeXx0y308/s1600/MFI_short.png" /></a></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">This is the daily chart of the GBPJPY. We have a 
rising wedge forming when the MFI is overbought. The short trade is 
initiated at the open of the next candle which breaks the lower border 
of the rising wedge. We also see the coloured MACD indicator showing a 
red candle bar, which confirms the short entry. The trade is taken and 
exited when the coloured MACD bars show blue or when the MFI gets into 
oversold territory. This trade would have netted about 300 pips.</span></div>
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</span><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Conclusion</b></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Make sure you practice how to trade each setup on a 
demo account before using the indicator to trade real money. Also pay 
attention to risk management.</span></div>
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Money Flow Index 34. Money Flow Index

Definition of the Money Flow Index Indicator The Money Flow Index is an indicator that utilizes the volume and volatility of an as...