Money Flow Index is a stand-alone type of indicator which analyzes the price and volume of a particular stock. It is also a momentum indicator sharing the similarities with Relative Strength Index (RSI) in both interpretation and calculation but only, MFI measures price instead. More so, it is a tool used in a technical analysis to calculate the pressure of buying and selling. MFI is also an oscillator for it measurements generate a value that is plotted with in a moving line of 0-100.
Terms You Need To Know
Oversold & Overbought
When a momentum and price vastly gains higher than the level, it is considered to be overbought. Oversold when what happens turns out to be the opposite as expected.
As shown in the char above, Money Flow Index above 80 usually shows that the security is overbought. When the price reaches this point it is most likely to tumble down. Monitor for market tops to transpire when the MFI is reaching the level above 80.
For Oversold, MFI below 20 are presented usually that the security is considered as such and an opposite trend may be expected with the price setting up to rally. Monitor for market bottoms to transpire when the MFI peaks down below 20.
Divergence comes when the MFI shows a different indication as to what is presented in the price chart.
As an example shown above, the price makes a new low but however, the MFI shows otherwise that it has a lower high. This is what you consider a bullish divergence.
For the second example, the price makes a high but on the other hand, MFI makes a lower high. This is called the bullish divergence.
Failure Swings are another possible occurrence in MFI and can result to the reversal of prices. Although these occurrence only rely on MFI alone for they are independent matters. Similar to divergences, they can be classified as bullish and bearish.
On a bullish failure swing, MFI drops to 20 or oversold. Another factor is when it drops to 20, it bounces back otherwise then pulls back but stays oversold. Lastly is when it breaks out of its previous high.
For the bearish one, MFI rises about 80 or overbought and drops back to 80. Then, just like on a bullish failure swing, it stays overbought but was able to rise a little bit. After that, it drops lower than the previous record.
Money Flow Index is a pretty much, an easy technical trading analysis indicator. Familiarize yourself also with RSI to ease up your use with MFI. As you can see, MFI uses the ratio of positive and negative money flow into the Relative Strength Index. It may be easy to track money flow with the terms of oversold and overbought, but it still depends on the distribution of the may affect the numbers when a midpoint is not presented. Always use the other indictors as well to find a clear path to your entry and exit at any times.
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