Trading Strategies Series Part 4

Trading Strategy with MFI & Super Trend

What is MFI?

The Money Flow Index (MFI) is a typical oscillator (between 0 and 100) that uses price and volume for identifying overbought or oversold conditions in securities. As a momentum oscillator that incorporates volume, MFI works well to identify reversals and price extremes.

The question will arise that how it is different from RSI?

As the MFI incorporates both price and volume data, as opposed to just price it has been referred to as the volume-weighted RSI.

The reason for this comparison is that MFI uses a similar formula to RSI. RSI uses the ratio of average gains to average losses, but the MFI incorporates a product of price and volume to calculate positive money flow and negative formula.

How to read MFI

• Overbought and oversold levels can be used to identify price extremes. Typically, MFI above 80 is considered overbought and MFI below 20 is considered oversold. However, the levels may stay at extremes for extended periods in strong trends.

• Divergences and failure swings can create high probability signals.

• A bullish failure swing occurs when MFI becomes oversold below 20, surges above 20, holds above 20 on a pullback and then breaks above its prior reaction high.

• A bearish failure swing occurs when MFI becomes overbought above 80, plunges below 80, fails to exceed 80 on a bounce and then breaks below the prior reaction low.

Strategy combining MFI and Super Indicator

This is a trend following system designed to catch sustained trends that uses the oversold and overbought conditions on the MFI to find low risk entry points. The conditions that can be set for the alerts are as follows:

1) Long Entry

A long entry should be made when these conditions are met:

Daily Chart

• Supertrend (10,4) indicator is lower than Price
• MFI (9) crosses above 25 or 50

Stop Loss & Exit Condition

Ideally the exit should be when Supertrend crosses above Price

2) Short Entry

A short entry should be made when these conditions are met:

Daily Chart 

• Supertrend (10,4) indicator is higher than Price
• MFI (9) crosses below 75 or 50

Stop Loss

Ideally the exit should be when Supertrend crosses below Price 

Single example giving idea for both the buy and sell. 

The MFI is an excellent momentum oscillator that can be used in conjunction with a trending indicator like Supertrend or even a moving average crossover system. So what are you waiting for just open your workspace and start experimenting.