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Money Flow Index (MFI)

Table of Contents

Money Flow Index (MFI)

Introduction

The Money Flow Index (MFI) is an oscillator that uses both price and volume to measure buying and selling pressure. Created by Gene Quong and Avrum Soudack, MFI is also known as volume-weighted RSI. MFI starts with the typical price for each period. Money flow is positive when the typical price rises (buying pressure) and negative when the typical price declines (selling pressure). A ratio of positive and negative money flow is then plugged into an RSI formula to create an oscillator that moves between zero and one hundred. As a momentum oscillator tied to volume, MFI is best suited to identify reversals and price extremes with a variety of signals.

Calculation

There are several steps involved in the Money Flow Index calculation. The example below is based on a 14-period Money Flow Index, which is the default setting in SharpCharts and the setting recommended by the creators.

First, notice that Raw Money Flow is essentially dollar volume because the formula is volume multiplied by the typical price. Raw Money Flow is positive when the typical price advances from one period to the next and negative when the typical price declines. The Raw Money Flow values are not used when the typical price is unchanged. The Money Flow Ratio in step 3 forms the basis for the Money Flow Index. Positive and Negative Money Flow are summed for the look-back period (14) and the Positive Money Flow sum is divided by the Negative Money Flow sum to create the ratio. The RSI formula is then applied to create a volume-weighted indicator. The table below shows a calculation example taken from an Excel spreadsheet.

Click here for an MFI calculation in an Excel Spreadsheet.

Interpretation

As a volume-weighted version of RSI, the Money Flow Index (MFI) can be interpreted similarly to RSI. The big difference is, of course, volume. Because volume is added to the mix, the Money Flow Index will act a little differently than RSI. Theories suggest that volume leads prices. RSI is a momentum oscillator that already leads prices. Incorporating volume can increase this lead time.

Quong and Soudack identified three basic signals using the Money Flow Index. First, chartists can look for overbought or oversold levels to warn of unsustainable price extremes. Second, bullish and bearish divergence can be used to anticipate trend reversals. Third, failure swings at 80 or 20 can also be used to identify potential price reversals. For this article, the divergences and failure swings are be combined to create one signal group and increase robustness.

Overbought/Oversold

Overbought and oversold levels can be used to identify unsustainable price extremes. Typically, MFI above 80 is considered overbought and MFI below 20 is considered oversold. Strong trends can present a problem for these classic overbought and oversold levels. MFI can become overbought (>80) and prices can simply continue higher when the uptrend is strong. Conversely, MFI can become oversold ( 90). Consider this a starting point for further analysis and due diligence.

For more details on the syntax to use for Money Flow Index scans, please see our Scanning Indicator Reference in the Support Center.

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Money Flow Index – MFI Definition and Uses

What Is the Money Flow Index (MFI)?

The Money Flow Index (MFI) is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset. It can also be used to spot divergences which warn of a trend change in price. The oscillator moves between 0 and 100.

Unlike conventional oscillators such as the Relative Strength Index (RSI), the Money Flow Index incorporates both price and volume data, as opposed to just price. For this reason, some analysts call MFI the volume-weighted RSI.

Key Takeaways

  • The Money Flow Index (MFI) is a technical indicator that generates overbought or oversold signals using both prices and volume data.
  • An MFI reading above 80 is considered overbought and an MFI reading below 20 is considered oversold, although levels of 90 and 10 are also used as thresholds.
  • A divergence between the indicator and price is noteworthy. For example, if the indicator is rising while the price is falling or flat, the price could start rising.

The Formulas for the Money Flow Index Are:

When the price advances from one period to the next Raw Money Flow is positive and it is added to Positive Money Flow. When Raw Money Flow is negative because the price dropped that period, it is added to Negative Money Flow.

How to Calculate the Money Flow Index

There are several steps for calculating the Money Flow Index. If doing it by hand, using a spreadsheet is recommended.

  1. Calculate the Typical Price for each of the last 14 periods.
  2. For each period, mark whether the typical price was higher or lower than the prior period. This will tell you whether Raw Money Flow is positive or negative.
  3. Calculate Raw Money Flow by multiplying the Typical Price by Volume for that period. Use negative or positive numbers depending on whether the period was up or down (see step above).
  4. Calculate the Money Flow Ratio by adding up all the positive money flows over the last 14 periods and dividing it by the negative money flows for the last 14 periods.
  5. Calculate the Money Flow Index (MFI) using the ratio found in step four.
  6. Continue doing the calculations as each new period ends, using only the last 14 periods of data.

What Does the Money Flow Index Tell You?

One of the primary ways to use the Money Flow Index is when there is a divergence. A divergence is when the oscillator is moving in the opposite direction of price. This is a signal of a potential reversal in the prevailing price trend.

For example, a very high Money Flow Index that begins to fall below a reading of 80 while the underlying security continues to climb is a price reversal signal to the downside. Conversely, a very low MFI reading that climbs above a reading of 20 while the underlying security continues to sell off is a price reversal signal to the upside.

Traders also watch for larger divergences using multiple waves in the price and MFI. For example, a stock peaks at $10, pulls back to $8, and then rallies to $12. The price has made two successive highs, at $10 and $12. If MFI makes a lower higher when the price reaches $12, the indicator is not confirming the new high. This could foreshadow a decline in price.

The overbought and oversold levels are also used to signal possible trading opportunities. Moves below 10 and above 90 are rare. Traders watch for the MFI to move back above 10 to signal a long trade, and to drop below 90 to signal a short trade.

Other moves out of overbought or oversold territory can also be useful. For example, when an asset is in an uptrend, a drop below 20 (or even 30) and then a rally back above it could indicate a pullback is over and the price uptrend is resuming. The same goes for a downtrend. A short-term rally could push the MFI up to 70 or 80, but when it drops back below that could be the time to enter a short trade in preparation for another drop.

The Difference Between the Money Flow Index and the Relative Strength Index (RSI)

The MFI and RSI are very closely related. The main difference is that MFI incorporates volume, while the RSI does not. Proponents of volume analysis believe it is a leading indicator. Therefore, they also believe that MFI will provide signals, and warn of possible reversals, in a more timely fashion than the RSI. One indicator is not better than the other, they are simply incorporating different elements and will, therefore, provide signals at different times.

Limitations of the Money Flow Index

The MFI is capable of producing false signals. This is when the indicator does something that indicates a good trading opportunity is present, but then the price doesn’t move as expected resulting in a losing trade. A divergence may not result in a price reversal, for instance.

The indicator may also fail to warn of something important. For example, while a divergence may result in a price reversing some of the time, divergence won’t be present for all price reversals. Because of this, it is recommended that traders use other forms of analysis and risk control and not rely exclusively on one indicator.

Commodity Channel Index – CCI Definition and Uses

What is the Commodity Channel Index (CCI)?

Developed by Donald Lambert, the Commodity Channel Index​ (CCI) is a momentum-based oscillator used to help determine when an investment vehicle is reaching a condition of being overbought or oversold. It is also used to assess price trend direction and strength. This information allows traders to determine if they want to enter or exit a trade, refrain from taking a trade, or add to an existing position. In this way, the indicator can be used to provide trade signals when it acts in a certain way.

Key Takeaways

  • The CCI measures the difference between the current price and the historical average price.
  • When the CCI is above zero it indicates the price is above the historic average. When CCI is below zero, the price is below the hsitoric average.
  • High readings of 100 or above, for example, indicate the price is well above the historic average and the trend has been strong to the upside.
  • Low readings below -100, for example, indicate the price is well below the historic average and the trend has been strong to the downside.
  • Going from negative or near-zero readings to +100 can be used as a signal to watch for an emerging uptrend.
  • Going from positive or near-zero readings to -100 may indicate an emerging downtrend.
  • CCI is an unbounded indicator meaning it can go higher or lower indefinitely. For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from.

The Formula For the Commodity Channel Index (CCI) Is:

How to Calculate the Commodity Channel Index (CCI)

  1. Determine how many periods your CCI will analyze. 20 is commonly used. Fewer periods results in a more volatile indicator, while more periods will make it smoother. For this calculation, we will assume 20 periods. Adjust the calculation if using a different number.
  2. In a spreadsheet, track the high, low, close for 20 periods and compute the Typical Price.
  3. After 20 periods, compute the Moving Average of the typical price by summing the last 20 Typical Prices and dividing by 20.
  4. Calculate the Mean Deviation by subtracting the Moving Average from the Typical Price for the last 20 periods. Sum the absolute values (ignore minus signs) of these figures and then divide by 20.
  5. Insert the most recent Typical Price, the Moving Average, and the Mean Deviation into the formula to compute the current CCI reading.
  6. Repeat the process as each new period ends.

What Does the Commodity Channel Index (CCI) Tell You?

The CCI is primarily used for spotting new trends, watching for overbought and oversold levels, and spotting weakness in trends when the indicator diverges with price.

When the CCI moves from negative or near-zero territory to above 100, that may indicate the price is starting a new uptrend. Once this occurs, traders can watch for a pullback in price followed by a rally in both price and the CCI to signal a buying opportunity.

The same concept applies to an emerging downtrend. When the indicator goes from positive or near-zero readings to below -100, then a downtrend may be starting. This is a signal to get out of longs or to start watching for shorting opportunities.

Overbought and oversold levels are not fixed since the indicator is unbound. Therefore, traders look to past readings on the indicator to get a sense of where price reversed. For one stock, it may tend to reverse near +200 and -150. Another commodity may tend to reverse near +325 and -350. Zoom out on the chart to see lots of price reversal points, and the CCI readings at those times.

There are also divergences. This is when the price is moving one way but the indicator is moving another. If the price is rising and the CCI is falling, this can indicate a weakness in the trend. While divergence is a poor trade signal, since it can last a long time and doesn’t always result in a price reversal, it can be good for at least warning the trader that there is the possibility of a reversal. This way they can tighten stop loss levels or hold off on taking new trades in the price trend direction.

The Difference Between the Commodity Channel Index (CCI) and the Stochastic Oscillator

Both of these technical indicators are oscillators, but they are calculated quite differently. One of the main differences is that the Stochastic Oscillator is bound between zero and 100, while the CCI is unbounded. Due to the calculation differences, they will provide different signals at different times, such as overbought and oversold readings.

Limitations of Using the Commodity Channel Index (CCI)

While often used to spot overbought and oversold conditions, the CCI is highly subjective in this regard. The indicator is unbound and therefore, prior overbought and oversold levels may have little impact in the future.

The indicator is also lagging, which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late, as the price has had its run and is starting to correct already. Such incidents are called whipsaws; a signal is provided by the indicator but the price doesn’t follow through after that signal and money is lost on the trade. If not careful, whipsaws can occur frequently. Therefore, the indicator is best used in conjunction with price analysis and other forms of technical analysis or indicators to help confirm or reject CCI signals. (For related reading, see «How Traders Use CCI (Commodity Channel Index) to Trade Stock Trends»)

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