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".
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.
Just before the trend change, the MFI may reverse without reaching the extreme zones. In this case, the direction of the transaction is determined by the central level 50: its breakdown from the bottom up is a signal for a CALL option for binary options signal service, from the top down - we open a PUT-option.
Be careful during periods of speculative movements and news, when a dynamic market completely "knocks" binary trade signals from MFI, all technical analysis strategies stops working. It is recommended to switch to the H4 timeframe or stay out of the market.
The MFI indicator may start moving opposite to the price chart, which will be a strong reversal signal. Here, the most important factor is the timeframe – the larger it is, the more reliable the divergence. A strategy for small intervals can take a temporary imbalance of forces for a divergence, which can be compensated after 30-60 minutes of the market, and the divergence ends despite binary signals free.
MFI rarely gives divergences, but if they appear, it means the beginning of a reversal after 3-5 bars of the working timeframe. According to signals binary review, we only work out direct (for a CALL option) and reverse (for PUT-option) patterns, open at the first candlestick after breaking through the extreme zones with expiration beyond the last price maximum/minimum.
Graphical analysis by Money Flow Index
On trading computers multiple monitor’s strategy, all popular patterns of graphical analysis are clearly visible, confirmed by both reversal strategies and trend continuation strategies: "Head and Shoulders", "Double or triple top/bottom", "Triangle" and others. Often, their appearance is several periods ahead of the price chart, which makes it possible to first of all exit the market on time and fix a profit.
During the publication of important fundamental news and statistics, we do not open options 30 minutes before the news and 30 minutes after the publication; cautious traders can close current deals. To control the events, we use the economic calendar included in the all popular binary trading platform!
Use with other technical tools
Like any oscillator only as additional element of a complex strategy. In addition to trend indicators, it combines well with Forex and cryptocurrency volume indicators, which are always associated with cash flow, and can give leading signals on timeframes greater than H1.
Adding trend indicator
As a trend indicator on live binary charts, we will use the Bollinger Band (BB), as a filter for MFI entry points. With an upstream BB channel, we are looking for opportunities for CALL-option, with a downstream channel, only PUT-option. On a sideways market, you can trade from the BB borders if the channel width is from 20-30 points. We follow the change in volatility - a sharp expansion of the channel indicates market instability and it is better to wait for confirmation from the oscillator.
Scalping within a range
Despite the recommendation to use higher timeframes, you can try trading free binary options trading signals in a sideways market and medium volatility. Set the MFI to the chart with a period of 6 and levels 70 and 30, and the Simple Moving Average with a period of 3:
- CALL-option: the price chart crosses the SMA from bottom to top; MFI is above level 30;
- PUT-option: the price crosses the SMA from top to bottom; the MFI is below the 70 level.
We open a trade on the next candle after the intersection point, binary options strategy provides for calculating the expiration at the last local maximum / min, but not less than 5-7 candles of the working timeframe. With strong trends, you can open several options.
- The MFI indicator on binary options trading signals live shows the current balance of power between buyers and sellers, as well as a forecast of how it may change in the near future. It should be borne in mind that it was developed for use in the stock market, where there is enough significant information in addition to the chart, especially the real volumes for each order and who placed them.
- Separately, we will highlight the fact that real binary options signals are not redrawn, so the risk management strategy and methodology can use the testing statistics on past data as a base for precise parameter settings. At the same time, like any other oscillator, the Money Flow Index is not the main factor in making a trading decision.
This means that its reversal does not indicate the starting point of a new long and strong trend. It shows only the dynamics of trading preferences, and how significant the change in the balance of power will be, is determined by other analysis tools, both technical and fundamental auto binary signals.