What is MFI Indicator in forex trading?
The Money Flow Index (MFI) is a technical momentum indicator that is used to identify the amount of money stock over a period. We can say it in different words, the indicator shows how strong the buying or selling pressure is on the market. The indicator was originally conceived by J. Welles Wilder and introduced in his book, New Concepts in Technical Trading Systems, in June 1978.
The principle behind the Money Flow Index indicator is when the reading moves above the center line, this implies an increase in buying pressure whereas if it moves below the center line then this implies that there is increased selling pressure on the market. With that said, does not mean an increase or decrease of money flow activity will always lead to an increase or decrease in price, however it will strengthen the probability of this happening.
How to use the MFI Indicator?
The most common use for the Money Flow Index is to follow price trends, usually by applying it with other indicators. MFI does not predict anything, but rather identifies where there are changes in buying or selling pressure which can be used as an indication of future price movement. If prices are growing, then this will likely continue if the money flow index is also increasing. When prices are decreasing, then this can be used to determine protection points.
For example, if the money flow index falls below the -100 level, then price will likely continue to fall. Alternatively, if the MFI moves above 100 then expect to see prices start moving up again. Just like all indicators, it should not be used independent of other indicators and in isolation.
One of the main benefits of the money flow index indicator is that it provides identification when there are large changes in buying or selling pressure. This is because money flow index uses volume moving averages to calculate the underlying data, hence giving traders an idea of whether there are large numbers of traders participating in either buying or selling.
Identifying turning points can also be done using this strategy as well by following changes in the MFI indicator since it will tend to turn before prices do. As well, many traders choose to use MFI in conjunction with other tools such as the stochastic indicator which will provide additional support for decisions made using the Money Flow Index.
Overall, it is important to remember that identifying turning points and changes in momentum are both done based on price movement and not the MFI indicator.