Oscillators are a favorite tool used by crypto traders. They appreciate it because most are easy to understand and use. There are numerous oscillators for technical analysis, with the RSI (Relative Strength Index) being 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. Cash flow index explained
MFI is a tool in technical analysis that measures how much money flows into and out of a financial asset. It looks at both the price and trading volume of the asset. This 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). not, or when it does something other than its price.
In simple terms, MFI helps cryptocurrency traders to understand the popularity and potential trends of a crypto asset.
2. Stages of MFI calculation
The calculation of MFI has several important stages. They are:
Phase 1: Calculate Typical Price (TP)
Add the highest (High), lowest (Low) and closing (Close) prices of a period, then divide by 3 to get the TP.
Phase 2: Calculate Cash Flow (MF)
Multiply the TP by the trading volume to get the Money Flow (MF).
Stage 3: Determine positive and negative cash flow
If today’s TP is higher than yesterday’s, it is considered positive cash flow. If today’s TP is lower than yesterday’s, it is considered negative cash flow.
Phase 4: Sum positive and negative cash flow for a chosen period
Add up all the positive cash flows to get Positive Cash Flow, and add up all the negative cash flows to get Negative Cash Flow for your selected period.
Phase 5: Calculate Money Ratio (MR)
Divide the sum of positive cash flows by the sum of negative cash flows to obtain the cash ratio (MR).
Phase 6: Calculate Cash Flow Index (MFI)
In the final stage, using the money ration (MR), calculate the MFI using the aforementioned formula.
3. Steps to start MFI on a TradingView Chart
The step-by-step instructions for starting the Money Flow Index (MFI) on a TradingView chart are given below.
Step 1: Log in to TradingView
Go to the TradingView website and log into your account.
Step 2: Search for the preferred card
Once logged in, you will be on the main TradingView page. In the upper left corner, you can type the name of a crypto asset or crypto trading pair. You want to analyze.
Click on the name of the asset you were looking for and a new chart will open.
At the top of the chart you will see a toolbar with different icons. Look for the ‘indicators’ icon.
Click the ‘indicator’ icon, and a search bar will appear. Type ‘Money Flow Index’ or ‘MFI’ in 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 in the left corner of the indicator. You can configure the settings by adjusting parameters such as the length (usually 14 by default) and the style and color of the MFI line. Once you’re done, click ‘OK’.
Step 7: Start analyzing for signals
The MFI will now be displayed on your chart. You can analyze it for signals.
4. Ways to interpret MFI
There are mainly two signals that MFI gives.
When MFI readings go above 80, it is considered ‘overbought’, indicating that the current trend may be ending, and a price drop can be expected. In strong trends, overbought conditions may persist, or you may see consecutive overbought readings.
Conversely, when MFI readings fall below 20, it is seen as ‘oversold’, suggesting that the current trend may end, and a price increase can be expected. In strong trends, oversold conditions may persist, or you may see consecutive oversold readings.
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 may indicate 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 filter out 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’.
When MFI drops below 20, rises, goes back above 20, tries to go oversold again but fails, and then breaks the previous high created by MFI, it indicates that the downward momentum is weakening, giving a bullish signal .
When MFI rises above 80, falls back below 80, tries to get 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, which provides a bearish signal.
5. End note
In conclusion, MFI is a valuable tool for crypto traders to gauge market sentiment and potential price trends. It provides 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.
Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
UnCirculars – Cutting through the noise, delivering unbiased crypto news
