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Money Flow Index Indicator

Money Flow Index Indicator ( MFI Indicator ): A divergence between the indicator and the price is noteworthy. So when the price goes from one period to the next the raw MFI is positive. It is then added to Positive MFI. So when the Raw MFI is negative the price is dropped and added to the Negative MFI. The divergence occurs when the oscillator is moving in the opposite direction of the price. The MFI provides an earlier signal than the RSI because it is a leading indicator. This indicator is the same as Relative Strength Index but it incorporates volume as RSI will consider the price. The MFI oscillates between the range of 0 and 100.

MFI Indicator Formula

Money Flow Index=100-{100/ (1+Money_Flow Ratio)}
Money_flow ratio= (14-peroidpositive money_flow)/ (14-peroidnegative money_flow)
Raw Money_Flow = Typical Price x Volume. Typical Price = (High + Low + Close)/3

MFI Example

They use a 4period setting and the Keltner channel is set with a 20-period setting. The 3.0x average true range multiple. The price reversal indicators will not plot the indicators on the chart in conjunction.

USe

Traders use volume in their analysis and also look for divergences between volume and price. If the volume is trending in one way the price will trend in the opposite direction. They are called leading indicators of an upcoming change in the direction of the market. Technical analysts believe that the price follows the volume. The volume trends down if price trends up. So some traders will believe that price is in reverse trend to match the volume. Depending on these two levels traders are biased towards long trade when a market is oversold. The price reversals are based on the premise of mean reversion markets working to normality.

Money Flow Index Limitations

MFI is capable of producing some false signals. So when the indicator does something as indicating a good trading opportunity is present. But the price doesn't move as expected results in a losing trade. The divergence may not result in a price reversal for instance. Money Flow Index is a momentum indicator measures the flow of money into and out of security over a period of time.

Conclusion

MFI is used in conjunction with some technical analysis tools. The tools are like volume and breakouts that are used to get the confirmed signal produced by MFI. This option is a simple and effective way of trading the binary options. Here depending on the risk and tolerance trade the MFI direction, overbought and oversold values.

Main Difference between Money Flow Index and Relative Strength Index

The MFI and RSI are related to each other. The difference between both is that the MFI incorporates volume while RSI does not. The proponents of volume analysis believe as a leading indicator. The MFI will provide a signal and possible reversal in a timely manner than RSI. The indicator is not good for others as they are incorporating different elements and provide signals at different times.