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- The Money Flow Index Indicator
Hey there👋🏼
RSI, Bollinger Bands, and ADX - most common indicators rely on price movements, and they may not tell the whole story. To truly spot a viable trend, you need the support of a volume indicator.
In today's edition, let’s learn about an indicator that draws insights from both price and volume. Say hi to the Money Flow Index.
MFI: the volume-weighted RSI
The money flow index (MFI) is a technical oscillator that looks at both the price of a stock and how much of it is being bought or sold, i.e. price and volume. It uses data from the past 14 periods to generate overbought and oversold signals in a stock’s price.
Plotted on a scale from 0 to 100, an MFI reading >80 is considered overbought while a reading <20 is considered oversold.
Since this oscillator is very similar to RSI and incorporates volume data, it is known as the volume-weighted RSI. The MFI is considered a leading indicator since it provides overbought and oversold signals in a more timely fashion.
RSI + MFI = A Great Combination
Using the MFI in combination with RSI can give you excellent trade signals. We will not change the default parameters of either indicator. Rather, we would combine them to create a new trading strategy.
Essentially, we are entering a trade as per a signal from the MFI, and exiting as per a signal from the RSI.
For a Long Trade:1) Enter when the MFI crosses above 80 2) The RSI should follow and cross above 70 as well 3) Exit when the RSI drops below 70 In the below trade, the RSI+MFI strategy produced a timely entry & better returns than the RSI alone ⏬  Green Line: Entry as per RSI+MFI | For a Short Trade:1) Enter when the MFI crosses below 20 2) The RSI should follow and cross below 30 as well 3) Exit when the RSI crosses above 30 Here too, the RSI+MFI strategy has given more timely trade signals, significantly improving returns ⏬  Green Line: Entry as per RSI+MFI |
Look at how combining the MFI and RSI indicators can produce more accurate trade signals than the indicators can individually.
Note: Keep in mind that not every strategy works on every chart. Make sure to backtest the strategy on a specific stock/index before using it. It is also suggested to not exclusively rely on a single indicator for trade signals.
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