Unlocking the Power of MFI in Crypto Trading

Oscillators are a favourite tool used by crypto traders. They appreciate them because most are simple to understand and use. There are numerous oscillators for technical analysis, with the RSI (Relative Strength Index) begging one of the most popular.

Did you know there is an advanced version of RSI? It is none other than MFI (Money Flow Index. Actually, MFI is similar to RSI. but it can provide more insights than RSI alone. Let’s dive deeper into this indicator.  

1. Money Flow Index Explained

MFI is a tool in technical analysis that measures how much money is flowing in and out of a financial asset. It looks at both the price and trading volume of the asset. It creates a bounded oscillator, which is like a line that moves up and down, between 0 to 100. This line helps us see when the asset might be too popular (overbought), not popular enough (oversold), or when it is doing something different from its price. 

In simple terms, MFI helps cryptocurrency traders understand the popularity and potential trends of a crypto asset.

2. Stages of MFI Calculation

Calculating MFI has several important stages. They are:

• Stage 1: Calculate Typical Price (TP)

TP = (High + Low + Close) / 3

Add the highest (High), lowest (Low), and closing (Close) prices of a period, then divide by 3 to get the TP.

• Stage 2: Calculate Money Flow (MF)

MF = TP * Volume

Multiply the TP by the trading volume to get the Money Flow (MF). 

• Stage 3: Determine Positive and Negative Money Flow

If today’s TP is higher than yesterday’s, it is considered positive money flow. If today’s TP is lower than yesterday’s, it is considered negative money flow. 

• Stage 4: Sum Positive and Negative Money Flow for a Chosen Period

Add up all the positive money flows to get Positive Money Flow, and add up all the negative money flows to get Negative Money Flow for your selected time period.

• Stage 5: Calculate Money Ratio (MR)

MR = Positive Money Flow / Negative Money Flow

Divide the sum of positive money flow by the sum of negative money flow to obtain the money ratio (MR).

• Stage 6: Calculate Money Flow Index (MFI)

MFI = 100 – (100 / (1 + MR))

In the final stage, using the money ration (MR), compute the MFI using the aforesaid formula. 

3. Steps to Launch MFI on a TradingView Chart

The step-by-step instructions to launch the Money Flow Index (MFI) on a TradingView chart is given below.

• Step 1: Sign in to TradingView

Go to the TradingView website and sign in to your account.

• Step 2: Search for the Preferred Chart

Once you are logged in, you will be on the main TradingView page. In the top left corner, you can type the name of a crypto asset or crypto trading pair. You want to analyse.

• Step 3: Launch a Chart

Click on the name of the asset you searched for, and a new chart will open.

• Step 4: Search for MFI

At the top of the chart, you will see a toolbar with different icons. Look for the ‘indicators’ icon.

• Step 5: Launch MFI

Click on the ‘indicator’ icon, and a search bar will appear. Type ‘Money Flow Index’ or ‘MFI’ into the bar. After that, you will see the Money Flow Index indicator listed. Click on it to add it to your chart. 

• Step 6: Configure MFI Settings

Click on the settings icon, situated at the left corner of the indicator. You can configure the settings by adjusting parameters like the length (usually 14 by default) and the style and colour of the MFI line. Once you are done, click ‘OK’. 

• Step 7: Start Analysis for Signals

The MFI will now be displayed on your chart. You can analyse it for signals. 

4. Ways to Interpret MFI

Primarily, there are two signals MFI gives.

• MFI Oversold/Overbought

When MFI readings go above 80, it is considered ‘overbought,’ indicating the current trend might be ending, and a price decline could be expected. In strong trends, overbought conditions can persist, or you might see consecutive overbought readings.

Conversely, when MFI readings fall below 20, it is seen as ‘oversold’, suggesting the current trend could be ending, and a price increase might be expected. In strong trends, oversold conditions can persist, or you might see consecutive oversold readings. 

• MFI Divergence

Divergence occurs when the price and MFI move in opposite directions.

In Bullish Divergence, the price makes lower lows, but the MFI forms higher lows, This can signal a potential trend reversal to the upside.

In Bearish Divergence, the price makes higher highs, but the MFI forms lower highs, indicating a potential trend reversal to the downside.

Using MFI divergence signals is risky as it can often give wrong signals. There are a few strategies that can help you to filter false signals in MFI divergence.

4.1. Strategy for Filtering False Signals in MFI Divergence

To filter out false signals in MFI Divergence, you can use a combination of ‘Failure Swings’ and ‘Divergence’. 

• Bullish Failure Swing

When MFI falls below 20, rises, goes back above 20, tries to go oversold again but fails, and then breaks the previous high created by MFI, it signals that the downward momentum is weakening, giving a bullish signal.

• Bearish Failure Swing

When MFI rises above 80, falls back below 80, attempts to go overbought by crossing the 80 level but fails, and then breaks the previous low created by MFI, it indicates that the upward momentum is weakening, providing a bearish signal.

5. Endnote

In conclusion, MFI is a valuable tool for crypto traders to measure market sentiment and potential price trends. It offers insights through oversold/overbought signals and divergence patterns. However, it is important to note that MFI is not foolproof and can sometimes produce false signals. It should be used in conjunction with other analysis methods for more reliable trading decisions.