02.09.2019
AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 23
:
Money Flow Index (MFI)
Oscillator MFI is based on volume
The Money Flow Index (MFI) is
belongs from oscillator family, MFI is based on volume. It is very similar to
the Relative Strength Index (RSI). The difference between is that the MFI based
on volume, whereas the RSI based on price. The Money Flow Index measures the
strength of money flowing into and out of a stock.
Like the RSI, the MFI is a
range-bound oscillator that oscillates between 0 to 100 and is often calculated
using a 14 day period. It works in a similar way as the RSI. If MFI is above
80; it is considered overbought stocks and if MFI is below 20 is considered
oversold stocks. But in Strong trends these signals may misleading.
Calculation of MFI:
Step 1: Calculate the typical
price
The typical price for each day
is the average of high price, the low price and the closing price.
Typical Price = {(Day High +
Day Low + Day Close) / 3}
Money Flow = (Typical Price) x
(Volume)
Step 2: Calculate the positive
and negative money flow
The MFI compares the ratio of
"positive" money flow and "negative" money flow. If typical
price today is greater than yesterday, it is considered positive money. For a
14-day average, the sum of all positive money for those 14 days is the positive
money flow. The MFI is based on the ratio of positive/negative money flow
(Money Ratio).
Money Ratio = (Positive
Money Flow / Negative Money Flow)
Finally, the MFI can be
calculated using this ratio:
Money Flow Index = 100 -
[100 / (1 + Money Ratio)]
The fewer number of days used
to calculate the MFI, the more volatile it will be.
Parameters -
Period (14) - the number of
bars, or interval.
Overbought and Oversold zone-
A stock is considered
"overbought" if the MFI indicator reaches 80 and above (a bearish
reading). A bullish reading of 20 and below suggests that the stock is
"oversold".
One should book profit in buy side positions and should avoid new buy side
positions in an overbought zone.
One should book profit in
sell side positions and should avoid new sell side positions in an oversold
zone
Summary:
Money Flow Index
✯ Money
Flow Index is a momentum indicator.
✯It
is similar to RSI.
✯Identifies
overbought or oversold markets.
✯It
is plotted on an inverted 0 to 100 scale.
✯There
are two basic methods of using these oscillators in ranging markets; using the
overbought/oversold regions and divergence between the price and oscillator.
✯
When the indicator first moves into the overbought zone and then crosses back
through the overbought line this is a signal to go short. Similarly when the
indicator moves into the oversold region and then crosses back across the
oversold line this is a signal to go long.
✯The
other use of Money Flow Index is to look at divergences between price
peaks/troughs and indicator peaks/troughs.
FOR
MORE SUCH TYPE OF EDUCATION JOINT OUR ONLINE SERIES AND BATCHES AND BE A PRO
TRADER CONTACT ON 7028 421 786.
Comments
Post a Comment