Predicting the Market with the Money Flow Index (MFI) as Technical Indicator

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Being as an investor or a trader in the forex trading, it’s a must to be very clever in reading the market. Every trader’s goal is making a great profit and minimizing the potential loss. Well, as we all know that the market fluctuates every second. It means that we have to take a deep attention in the price movement, the trend tendency, and plot a correct strategy with the stop loss point, entry-exit point and of course, make a good analytical thinking in making decision. In this point, choosing a suitable technical indicator is one important thing to do as there are many indicators which can be used but not all of them will be suit on us.

Money Flow Index (MFI) is a technical indicator which is designed to measure the market strength and savings. It has a same construction and interpretation with the Relative Strength Index (RSI) with a little difference in term of how the calculation is determined. If the RSI measures the market saturation, the MFI measures the account volume. MFI has a scale from 0 (zero) to 100 (hundred).

In the Money Flow Index, the difference between price movement and indicator is an important thing to consider about. If the price climbs up and the MFI falls down or vice versa, it could possibly a signal of a coming reversal trend. The potential top and bottom margins are indicated if the MFI value is above 80 or below 20.

Calculation :

The MFI calculation has several steps below:

1. First, we have to determine the Typical Price( TP) within a particular period

The formula is:  TP = (High + Low + Close Price) /  3      

      

2. Determine the Money Flow (MF) by multiplying TP with Volume

The formula is:  MF = TP * Volume

If the current TP is bigger than the prior TP, we can say that the MF is positive but if the current TP is lower than the previous one, the MF is negative. The Positive Money Flow (PMF) means an amount of positive money flow within a particular time period while the Negative Money Flow (NMF) means an amount of negative money flow within a particular time period.

 

3. Determine the Money Ratio (MR) by dividing the positive MF with the negative MF.

The formula is:  MR =  PMF / NMF

 

4. The last step is determining the MFI

The formula is: MFI = 100 – {100/(1+MR)}

Okay, that’s all about how to calculate the MFI and its advantage.

Happy trading in PAMM Investments !

Don’t forget to read this important article for PAMM trader

1. How to become a PAMM Trader

2. Understanding your Forex Trader Level as PAMM Trader