this is Mark from Tradinformed.com and welcome to this video on the money flow
index or MFI indicator as the name suggests the money flow index uses
volume as part of the calculation now this makes the obvious step that price
moves that are based on larger volume have got more participants and so are
more significant so the MFI it looks something if we look
at the calculations it looks something like the RSI indicator which is very
popular but I think the MFI deserves to be just as popular if not more so
because it is taking into account the amount of participation in the move on
the screen you can see the SPY SPDR etf here between 2018-2019 going into
2020 and along the bottom is volume now it's pretty easy to see this is not a
huge sample size but it is pretty easy to see that the majority of these bars
are Green, which is not surprising because the market has risen during this
period, however, it is equally fairly obvious to see that a large proportion
of the red bars this is the volume that has occurred on a down day a large
proportion of the tall bars rather are red even with this relatively small
sample we can see there is a bit of an imbalance the market that has tended to
go up but has large bars tending to be red and this is a pattern that I expect
you can see throughout most periods of history in the panicky moments when we
are selling off tend to have the largest volume okay so this is giving us a clue
that volume is at least some significance that is not displayed in
any technical indicator that only includes price now if we add the money
flow index the MFI to the chart we can see how we can see
firstly how it looks it looks similar to RSI it looks similar to the stochastic
oscillator etc however we can see that where we have high volume we have an
exaggeration in the indicator we have the normal overbought and oversold areas
that I'm going to talk about more later when I talk about the MFI trading
strategy now in this spreadsheet I have the calculations for the MFI and the
reason that I'm showing you this is because I believe that if you want to
use a technical indicator you should understand how it is calculated what
numbers what data it uses in the calculation so firstly we start off with
the typical price this is just the average price and you can see I put the
formula there the high price the low price and the close price divided by
three so it's an average of these three prices we multiply that by volume to get
the money flow and then if we have a positive value getting used to the RSI
calculation this is very similar if we have a positive close in other words
that close is higher than the previous we record the value in this column if we
have a lower close a negative close the value is recorded in this
column we divide one by the other over the number of periods that we want to
use so I'm using 14 periods and then we use the formula to make it into the
oscillator that we know that is bounded between 0 and 100 now if you want
to calculate this yourself it's very easy to do so you can either use this
principle here or there is a link on the screen if you want to download this
spreadsheet or a spreadsheet containing the MFI for free just subscribe to
tradinformed.com there's also a link below this video if you want to do that in
this video we've looked at the MFI we've looked at what does it look like we've
looked at why I think it is useful and why every
technical trader should know about this indicator and maybe even use it and
we've looked at how you can calculate it but the key question is is it any use as
part of a trading strategy and that question is going to be answered in the
next video in this series so please click on the link and check out that
video and if you want more information about trading the financial markets in
particular about how to back test your trading strategies to get the trading
results that you deserve please go to
www.tradinformed.com