WHAT IS THE MFI INDICATOR?

What is the MFI indicator? Does it bring any benefits? At COINSTRATEGISTS, we will provide the most detailed answer to this question. Let’s explore the article below to better understand this important indicator and how it affects your trading decisions.

WHAT IS THE MFI INDICATOR?

The MFI indicator or cash flow indicator is an oscillator that uses both price and volume to measure buying and selling pressure. This is an indicator that is quite commonly used in technical analysis.

To simplify the concept of the MFI indicator, you can understand the MFI which helps you understand that an asset class such as cryptocurrencies, stocks,… does it really attract investors.

The MFI indicator is related to the RSI relative strength index but in conjunction with volume, whereas the RSI is only related to price.

HOW THE MFI INDICATOR WORKS

The MFI indicator is calculated by accumulating positive and negative money flow values, creating the Money Ratio, and then normalizing to the MFI oscillator.

Cash flow is positive when prices rise (buying pressure) and negative when prices fall (selling pressure). This ratio is included in the RSI formula to create an oscillation from 0 to 100. The MFI indicator helps identify price reversals and extremes.

Explain

The chart shows: oversold levels below 20 and overbought levels above 80, influenced by market conditions.

Drawing lines from the highest highs or lows, but not enough to make a trading decision. Should combine other indicators such as MA, MACD, Elliott,…

The point to note is that in a strong trend, the MFI index can maintain the overbought zone for a long time, and divergence can signal a price reversal. If the price reaches a low high, the MFI indicator does not confirm.

HOW TO CALCULATE MFI

Quite a bit of calculation, as MFI requires:

The first is Typical Price = (high price + low price + closing price) / 3.

Next is cash flow. Cash Flow = Typical Price * Volume. If today’s normal price is greater than yesterday’s normal price then it is considered positive cash flow. If today’s price is lower then it is called negative cash flow.

And cash flow ratio = Positive Cash Flow / Negative Cash Flow.

Positive cash flow and negative cash flow are the sum of each over a specified period of time, usually 14 periods. Ultimately, what counts is:

MFI = 100 – 100 / (1 + cash flow ratio)

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DIFFERENCE HOLDING MFI INDICATOR AND RSI

Relative Strength Indicator MFI and RSI are very closely related. As mentioned, the main difference is that MFI combines price and volume. While the RSI is only related to price.

Proponents of volume analysis believe that the MFI indicator is a leading indicator. Therefore, they also believe that the MFI will provide signals and warnings about possible reversals. That is, following the trend more timely than the RSI. 

You can see that MFI, or RSI, is simply a combination of different factors and market conditions. Therefore, it will provide signals at different times. So it is also difficult to accept which one is better than the other.

DISADVANTAGES OF THE MFI INDICATOR

What is the MFI indicator? The advantages you can see by the way it works. So what are the disadvantages? Let’s find out:

The MFI indicator can produce false signals. This is not an indicator, it’s just a little different from its way of liking. 

This is when the indicator does something that indicates a good trading opportunity. But then the price does not move as expected, leading to a losing trade. A divergence may not lead to a price reversal.

Let’s evaluate this point with the following example: 

While divergences can lead to price reversals at some point. But divergence will not be present for all cases of price reversals. 

Therefore, traders should use other forms of technical analysis and risk control and not rely solely on a separate indicator. I have always reminded you of this, so please keep it in mind.

BUYING AND SELLING TECHNIQUES USING MFI

What is the MFI indicator? Use MFI and you wonder: Are there any tricks to buying or selling when you see a sign? So let’s take a look at this technique:

When MFI falls below 20 it is oversold. After the MFI rose above 20, even though there was a correction, it was still above this level. This was a good buying signal, showing that the index had surpassed its previous peak.

When to sell: As mentioned, the MFI crossed the 80 level, indicating an overbought area, then corrected below 80 while the market went short and considered taking profits.

COINSTRATEGISTS has provided another indicator for you. Please use these indicators to make price assessments and consider carefully before forming an investment opinion, as this article does not provide investment advice.