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Home Technical Analysis
How to generate trading signals using Money Flow index and 20 SMA? 1

How to generate trading signals using Money Flow index and 20 SMA?

Elearnmarkets by Elearnmarkets
August 10, 2022
in Technical Analysis, Charts, Patterns & Indicators
Reading Time: 3 mins read
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Price and volume are two of the most basic but very essential indicators in technical analysis to predict price movement.

To take care of price and volume data, you may use Money Flow Index (MFI).

Money Flow Index is a momentum oscillator which identifies the momentum of outflow and inflow of money of a stock over a given time period.

It is one of the popular technical tools found in the most trading platform.

You may do NSE Academy Certified Options Strategies to learn and frame your own strategies to trade in the market.

Calculation

The Money Flow Index (MFI) calculation involves the following steps-

Join TMP Join TMP Join TMP

1. Typical Price = (High + Low + Close)/3

2. Raw Money Flow = Typical Price x Volume

3. Money Flow Ratio = (14-period Positive Money Flow) / (14-period Negative Money Flow)

4. Money Flow Index = 100 – {100 / (1 + Money Flow Ratio)}

MFI interpretation

MFI is also known as a volume-weighted version of RSI as it is interpreted similarly to RSI oscillator; however the main difference in MFI is with regards to volume.

Due to the volume feature, MFI works little differently than that of RSI.

Also Read: RSI Indicator and How is it useful in Trading Stocks?

By computing the indexed value depending on the number of bars (as specified in the money flow index setting), a line is plotted on the chart which oscillates between 0 and 100 level.

Also read: Triple screen trading system: the Alexander Elder way of trading

With the rise in stock price, the MFI also goes up which signals increasing buying pressure.

On the other hand, MFI goes down with the decrease in price thus signalling decreasing buying pressure. Thus you may predict the directional movement of the market simply by keeping a watch on MFI.

Trading strategy using Money flow index

 

If you want to learn technical analysis you may do NSE Academy Certified Technical Analysis course.

Strategies using MFI

Case 1: When price cuts above 20 SMA from below and simultaneously MFI also cuts above the 40 line, it generates a buy signal.

Case 2: Similarly, when the price cuts below 20 SMA from above and MFI also cuts below the 60 line, it generates a sell signal.

Strategy using MFI and 100 DMA

Conclusion

Like other technical indicators, MFI should also be used in conjunction with other technical analysis tools like chart patterns, volume and breakouts can be used to get confirmed signals produced by MFI.

In order to get the latest updates on Financial Markets visit https://stockedge.com/

Tags: englishMFImoney flow indexmoving averagetechnical analysistrading signals
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Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education. ELM constantly experiments with new education methodologies and technologies to make financial education effective, affordable and accessible to all. You can connect with us on Twitter @elearnmarkets.

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