Hello, this is Mark from Tradinformed.com.
And welcome to this video on the Money Flow Index Trading Strategy.
Now in this video I'm going to describe the Money Flow Index or MFI.
I'm going to look at a trading strategy using the S&P 500 and will describe the results
that I've got and show the results of a backtest of this trading strategy.
So the first things is: What is the Money Flow Index?
I've got it here, showing on the chart.
This is the S&P 500 and at the bottom of the chart we have the MFI.
The MFI is quite interesting, and relatively unusual for technical indicators, because
it uses volume in a nice way.
If you look at the indicator at the bottom of the chart, it looks fairly similar to other
oscillators.
And this is because it incorporates Volume into the calculation, which is quite similar
to the RSI: The Relative Strength Index.
So what we get is a sort of crossover, combination indicator that has volume, and uses the significance
of volume data, but it also puts it into a nice oscillator that ranges from 0 to 100
and we can use it to trigger entries and take profits.
OK, so the trading strategy that I am gong to use today is going to use the MFI both
to enter and exit trades.
And we've also got this red dashed line on the chart here which is an Exponential Moving
Average.
Now we are using the EMA as a filter: Long trades only above the EMA and Short trades
only below.
I like to use EMAs quite a lot in my trading strategies as a simple way to define the trend.
OK, so we're using this lower line here on the MFI as an entry trigger.
So we have a cross above this lower line, so you can see we have a green arrow.
And this trade is going to follow all the way up here.
So we're opening it in February and it is going to follow all the way up until June
and we have a Profit Target which was hit here.
And we're actually closing this trade in 2 parts which is a slightly more advanced way
of managing the trade.
The first part of this trade is going to be closed using a profit target and that profit
target is set based on the ATR: the Average True Range.
And the second part I am using the MFI, so once we've hit our profit target and taken
some money off the table, then we're going to look at the MFI.
And in this case it closes straight away.
Because I'm using the MFI, anything in this red zone here above this upper line, as a
signal to close the trade.
So we've taken our profit target, we've made a very nice profit here and the next period,
well we're already in the closing zone, so we can close it on the next period.
Short Trades are going to be done in exactly the same way.
Just to remind ourselves, in this case I'm using 2 line for the MFI.
These can be refined, but these are the lines I'm going to talk about in the video today.
Right, so the backtest of the trading strategy that I'm going to use is a Tradinformed Backtesting
Spreadsheet.
And there are a variety of these spreadsheets that are available on the Tradinformed website.
There is a link on the screen for more information.
This particular one, as I was describing earlier, is using a slightly more advance form of trade
management.
We are opening the trade, or we are replicating the effect of opening the trade in 2 separate
positions.
And so we can control them in different ways.
We can set different profit targets and we can set different ways of closing each one
of these positions.
So this is the standard set-up for a Tradinformed spreadsheet.
Over here, on the left, we have the data.
Open, High, Low, Close plus the Volume, which is of course necessary to use the MFI.
In the middle here, I'll just open these out, we have the, in white here, we have the technical
indicators that I'm using for this particular backtest.
So we have the first set of columns is the MFI.
We're using an EMA: Exponential Moving Average and the ATR.
So it is just 3 technical indicators.
Now the calculations for these technical indicators, for the MFI came from a spreadsheet that I
produced which is here.
And it comes from an eBook, which is available in the Amazon Kindle Bookstore.
And there is information on the screen if you want information about how to calculate
a variety of different technical indicators.
They are all in Excel, the eBook gives explanations and examples of how to use it.
So we've got the MFI here.
We've got Value Charts, Ichimoku, Heiken Ashi.
A wide variety of different indicators and chart patterns that can be programmed into
Excel.
OK, so back to the backtest spreadsheet.
Get rid of this again.
To hide it, we don't need this at the moment.
So they are the 3 indicators, the MFI, EMA and ATR.
So the bit over here in green and this reddish colour are the long and the short trades.
And this is the actual backtest model.
If I scroll down here, we'll see the different trades being opened and close and analysed
by the spreadsheet.
So these are the results, if we look over here we have
the backtest equity graph.
We can compare this to the, this will be familiar to many people, the S&P 500.
Now I've used a backtest between 1984 and the 3rd month of 2015.
So we've got quite a lot of data here.
The S&P has obviously had its ups and downs during that period.
The 1989 crash is in there, back in 2002-03 we had the bear market, we had of course the
more recent one in 2008-09.
And then the more recent recovery since then.
With these ups and downs of the stockmarket over this period.
We can see that this strategy has managed to hold pretty well.
It uses long and short trades, considering that the market has mostly gone up during
this period.
It's inevitable and to be expected, that it is easier to make money on the long side.
But we have had some significant periods of downturn as well.
And the model has managed pretty well during those periods.
Taking some money from short positions as well.
So we've got lots of different things that we can alter here.
We can increase the cost of trading.
And see how this affects.
We can adjust our profit targets, I'm using a multiple of the ATR so I can set that from
4 to 6 and see how it affects the results.
I'm also using a stop-loss, also based on the ATR.
And we're also using a trailing stop as well.
The trailing stop is of course designed to lock in profits, once the position moves in
our favour.
I can adjust the length of the EMA from 50 to 200.
And we get different results and a different equity graph by adjusting these things.
We've got our long entry and short entry based on the MFI levels.
If we go across here we can look at the results.
We've taken a good number of points over this time period.
We've shown a good Profit Factor which is the gross winning trades divided by losing
trades.
Getting almost up to 3:1 there, which is a decent ratio.
So what do we have in terms of profitability.
Well, we're showing somewhere around 70% win percentage.
Which again is quite decent, it depends on your aims but it is quite decent results.
We're invested 38%of the time.
This trading system is designed to pick up good entry points, good value entry points
in the direction of the dominant trend.
So we've got 38%of the time.
The average length of a trade is 96 and 77.
These are quite long trades, we are looking at multi-month trades here.
You would have to have a long-time frame and aspirations, but you can see over that time
we have done pretty well historically.
The maximum length of a trade lasts for more than a year, 386 trading days.
And the minimum length is just 13.
But even that is over 2 weeks.
And it reflects the fact that we're using, once we've entered a trade, we're giving it
plenty of room to move.
OK, so there were the results, there is a link on the screen if you'd like to see the
accompanying article with some more detailed information on it.
Please subscribe to this channel if you would like more information, there is already lots
of different trading strategies, information about technical indicators on the channel,
so do subscribe for more videos and information.
And for more information about trading strategies, technical indicators and trading the financial
markets, please go to www.tradinformed.com