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MFI indicator - looking for active money

MFI indicator - looking for active money

The Money Flow Index (MFI) indicator is one of the basic elements of Bill Williams “Theory of Chaos”, how to make money on binary options, which shows the degree of attractiveness of an asset to investors. In addition to the dynamics of trading interest, it also takes into account the market volume. According to the author, this allows us to determine the moments of "entry and exit of active money".

Calculation algorithm 

The basis is the "typical" price for the selected period, which is calculated as the arithmetic mean of the Low, High, and Close prices. Such a price, according to Williams, more accurately reflects the situation for the winning binary signals than just the closing price. If the price of the current period is higher than the previous one, money volume is added in the market, if the decline in activity is lower.

The amount of "cash flow" is defined as the product of the typical price and the number of transactions in the selected period. The basic binary options signal methodology provides for entering the market with a sharp change in the flow, which is measured by a special coefficient bringing the total values into the range of 0 - 100. The algorithm does not contain any smoothing, follows the price and can give leading signals.

According to Chaos theory, the strategy of market crowd behavior is as follows:

  • Traders with positions in the direction of the current trend are planning to take partial or complete profit / loss. At the same time, those who play against the trend in the live Forex trading room increase their losses and also try to close trades. But both sides are in no hurry to open new options. Result: MFI declines, confirming the fall in market volumes.
  • When one of the parties decides to reverse the market or resume the current trend, capital flows into selling or buying. The MFI value accordingly begins to grow as the new trend develops. Here it is important to understand that the strategy should only take into account the direction of the indicator, and not specific values, especially on the cryptocurrency trading signals.

The MFI indicator was developed to process the real exchange volume of the stock market, but observations of Forex and crypto market show that tick values, where only the number of transactions per timeframe is counted, can also be applied without significantly reducing the quality of signals.

Three groups of Money Flow Index options trading signals

The first group of signals will be the overbought and oversold zones that are standard for oscillators. Each tool counts them differently, but the principle is the same:

  • If the value of the indicator becomes above level 20 (30) it means the end of oversold and you can open the CALL-option.
  • Exit from the overbought zone, in our case, below the level of 80 (70) will be considered signal for PUT-option.

If high tick volumes persist long enough, the MFI indicator tends to "stick" in the extreme zones. Watch out for other indicators and free binary signals, there may be good entry points during these periods.