The Money Flow Indicator indicator is an accurate indicator that is very popular amongst technical traders and investors. It is amazing that this technical indicator is still used every day by a lot of traders worldwide despite being developed more than 20 years ago. The following article will describe how to make profits with Money Flow Indicator for great pips in any Forex pair and stocks.
The Money Flow shows the location of price in relation to local high and low of the last 5 bars (by default), and takes into account volume as well, so you get a full picture of the market. As a conclusion, when it reaches its low values it means that price is at a support level, and when it is on overbought level it is at proximity to a resistance level (and may go down). It is recommended to confirm these signals by price-action or chart patterns, to confirm that the price is actually on a support or a resistance level. This gives the signals a higher win rate and better accuracy.
One technique of trading the Money Flow is the overboughtoversold system. When the MFI crosses the overbought level (usually 80) downwards it is a sign that the bull trend is at its end and it is the time to sell. When the indicator index touches the oversold level (usually 20) upwards it is a long signal and a sign that an uptrend is about to begin. The idea behind this system is that when the price hits support or resistance level and begins to reverse, we join the trend and profit from it. It is recommended to confirm this set-up with a Relative Strength Index indicator, to make sure that the signal is strong and accurate. A positive point of this method is the fact that it works with very small stop loss.
Another trading method is the the POP system – the idea behind it is exactly the reverse. The basis of this system is to enter buy trade when the index crosses 70, and short trades when it crosses the 30. Trades are closed when the Money Flow crosses the overbought (for long trades) or the oversold (for sell trades). This system worked well at the 70s and 80s and profits to this day on pairs that trend strongly like the GBPJPY.
We suggest placing the stop loss 5 pips below the lowest low of last 4 bars (for sell trades), and 5 pips above the highest high of last 4 candles (for longtrades), so the risk is kept to minimum and your profit is very big. This technique works exceptionally well with the overboughtoversold trading system. As usual, it is recommended not to risk more than 1-2% of your money on a single trade, this is standard capital management techniques that can be used regardless of your trading method.
Another trading technique that uses this oscillator is the zero-line cross. When the index crosses the middle-line (level of 50) from above it is a sell signal and when it crosses it from below it is a long signal. This is the ordinary trend-following system that is lagging but may profit at FX pairs that have long trends.
In conclusion, the Money Flow Indicator is a very profitable technical indicator that made profits for more than 20 years and will continue to work this way for years to come. Learn to use and master this FX indicator, as it could highly improve your trading and accuracy.