## Understand Price và Volume, and how these can affect market, is important in trading

In the past few weeks, we have focused on a number of technical indicators (our nhận xét of how the Parabolic SAR và the directional movement index works).

Bạn đang xem: Money flow index indicator: how to lớn use it in day trading

In these articles, you have learned about how you can use these technical indicators successfully in the market. This time, we will look at another indicator that has become relatively popular.

In this article. We will look at the Money Flow Index (MFI) và how you can apply it successfully in the financial market.

## What is money flow index indicator?

Money flow index was created by gene Quong and Avrum Soudak. You will find the indicator in all trading platforms lượt thích the MT4 và our PPro8.

The MFI is a leading indicator that uses price and volume to lớn show whether the price is overbought or oversold. The index is usually positive when the price is rising và negative when the price is falling.

The best way lớn think of the MFI is lớn consider the RSI, which we covered before. Basically, Gene & Avrum understood the importance of volume và how it affects the markets. They therefore added volume khổng lồ the calculation of the MFI.

### How khổng lồ Calculate: MFI formula

The MFI is calculated using a very simple formula. As we have written before, you don’t need to lớn know how these indicators are calculated.

While we have been in the trading business for many years and use these indicators often, we don’t know how most of them are calculated.

The MFI is calculated as follows:

You calculate the Typical Price (TP). You do this by adding the high, low, & close prices và then dividing the total by three.After finding the typical price, you calculate the Raw Money Flow. You vì this by multiplying the Typical Price with the volume.Calculate the Money Flow Ratio. You vì this by dividing the period (often 14) positive money flow by the period negative money flow.

Finally, the MFI is calculated by using the following formula.

 Money Flow Index = 100 – 100 / (1 + Money Flow ratio)

## Money Flow Index vs RSI

The MFI is usually interpreted in a similar way to lớn the RSI. The big difference between the two is that the MFI incorporates volume. Because of this, the MFI tends lớn act a bit differently with the RSI because volume leads prices.

For starters, the Relative Strength Index (RSI) is a technical indicator that is classified as an oscillator. It basically measures the tốc độ of change of a financial asset & helps lớn identify overbought và oversold levels.

The RSI is calculated using the formula below.

 RSI = 100 – 100/ 1 + RS

where the RS refers lớn the relative strength.

RSI VS MFI

A key difference between the RSI and the MFI is the default locations. In the RSI, the mặc định oversold màn chơi is 30 while the overbought is at 70. In the MFI, the two defaults are at 20 và 80, respectively.

However, you can always change these figures in the settings.

## How to Use the money flow index

A good way lớn use the money flow index is to lớn identify the overbought and oversold levels. When the MFI is above 80, the price is said to be overbought. It is said to be oversold when it is below 20.

However, as we mentioned when talking about the RSI, it is not mandatory that a reversal will happen the overbought và oversold levels are reached.

The price may continue lớn move higher when it reaches the overbought level of 80. It may also continue khổng lồ move lower when it moves lớn below 20. This happens when there is a very strong trend.

The chart below shows the MFI in action on the apple stock.

MFI on táo Stock

## Using the MFI to lớn find divergence

Divergences refer to points where an asset’s price is rising while the indicator is falling and vice versa. Identifying a divergent period early enough can help you see when a reversal is about to lớn happen.

First, you need to lớn look at an asset’s price visually & see the initial trend. Second, you should look at the performance of the MFI and join the key levels.

In this case, if the price is rising while the MFI is moving lower, it could be a sign that a bearish trend is about to lớn start. A good example of this is in the Microsoft tóm tắt price below.

Divergence found in Microsoft Stock with MFI. Chart from Tradingview

As shown in orange, the MSFT stock price is generally in an upward trend. At the same time, joining the upper sides of the MFI shows that it is moving lower. Ultimately, the shares broke out lower.

This is a good example of how this divergence works. However, a key issue is that divergences are rare occurrences in the market.

In addition khổng lồ identifying overbought and oversold levels, another key method of using the MFI is khổng lồ follow the trend. In this, you should buy the asset when the MFI is rising & vice versa.