In this article, you will learn what is a money flow index indicator. Technical traders and chart readers use oscillators to help identify the direction of trends and the momentum, or strength, behind those trends. There are hundreds of oscillators, and many other indicators, that a technical trader might use on their charts. The money flow index indicator is a popular one.
What Is a Money Flow Index (MFI) Indicator?
The Money Flow Index, or MFI, is a tool used in technical analysis for measuring momentum in a financial asset by showing the inflow and outflow of money into that asset over time.
The MFI analyzes both price and volume, and generates a bounded oscillator that indicates when the asset may be overbought, oversold or diverging from price. The MFI is easy to read since the oscillator appears as a separate window toward the bottom or top of the chart. Additionally, the MFI is versatile since it can be applied to any financial asset.
However, MFI is especially useful in crypto as the flow — or volume — of trading activity factors into the oscillator’s calculation. In addition, we can use this volume at the intraday level. As a result, many experienced traders consider the MFI to be a “volume-weighted RSI,” as it resembles the Relative Strength Index (RSI) while also including volume.
MFI is a bounded oscillator, with its values standardized between 0 and 100. The default setting is 14 periods and is typically viewed on the daily chart time frame. This is because the volume can be starkly different depending on the time of day. Therefore, daily time frames will automatically incorporate slow and fast trading sessions.
How to Use MFI to Find Divergence and Overbought, Oversold Zones
Divergence is a silent but powerful alert which oscillators provide. Since the MFI includes volume within its calculation, traders would argue that the divergence witnessed in crypto using MFI may be even more powerful than divergence indicated by other oscillators.
Divergence simply means the price is moving in one direction, but the oscillator is moving in the opposite direction. The price is said to be diverging from the oscillator, alerting traders to a potential reversal in the market’s price.
Overbought zones are considered above 80 on MFI. This is generally associated with price and volume rising rapidly in a small amount of time. Overbought zones imply the market has risen too far, too fast, and is due for a correction.
On the other hand, oversold zones for MFI are when the oscillator drops below a reading of 20. When MFI is this low, it means that price has fallen fast on rising volume. This behavior is generally thought to be bullish, as the price has moved too far and too fast to the downside.
Bottom Line
By including trading volume into its formula, the momentum of trends can be seen more clearly, since many experienced crypto traders believe trends follow volume. So, MFI indicator will help you and this is about what is money flow index indicator.
