The Money Flow Index binary options’ indicator is another representative of the indicator oscillators group, though it has one small peculiarity. It takes into account the tick volumes. In particular, it determines the price movement rate, and it is in some way very similar to the Relative Strength Index. This similarity appears in both calculation and essence of this indicator itself.
Description of Money Flow Index
Before starting to describe this binary options’ indicator, we would like to note that it is more stable than others. Possibly, it is for the reason it takes into account the tick volumes. For that very reason, it is frequently used in order to change the strength of the money movement into different assets.
The Money Flow Index binary options’ indicator is based on the comparison of the positive and the negative money flows, which results in providing the possibility to determine the extent of the particular trend’s strength. As we have already noted above, this indicator is very similar to the Relative Strength Index. Therefore, its oscillations are limited by the levels of 0 and 100.
As for the period, it is usually set at the level of 14. If a price for the particular period is higher than for the previous one, then it is the positive money flow. Therefore, if the opposite situation is observed, then it is the negative money flow. The change of the period leads to the change in the indicator’s work. It can become more or less sensitive.
Signals of MFI indicator
As for the signals of this binary options’ indicator, they are very similar to the signals of other oscillators. In particular, it refers to the divergences and the overbought and the oversold zones.
The first thing we would like to discuss is the divergence. This signal appears when the divergence between the indicator’s line and the price chart is observed. If a price shows the new maximums and, at the same time, the indicator’s line doesn’t update its maximums, then the so-called bearish divergence will appear. In this case, before buying the Put option, it is desirable to wait until the price reversal.
As for the bullish divergence, it appears when the new minimums on the price chart appear, but, at the same time, the indicator’s line doesn’t update minimums no more. For a Forex trader, this is a good signal to open either the pending order or the position with a stop-loss. However, for the binary options’ traders, it would be better to wait until a price reverses up and only then buy the Call binary option.
Also, you can use the overbought and the oversold signals in the work with this indicator. In this case, it is needed to wait until a price moves higher than the zones of 20 or 80. If a price is higher than the line of 80, it means that it is in the overbought zone and the reversal of a trend down is possible. In this case, you have to buy the Put option. Therefore, if a price is below the line of 20, then a price is in the oversold zone and you can buy the Call option. But, in this case, it is also necessary to remember that a price may stay in the overbought or the oversold zones for some time. For this reason, it is recommended to wait until the price reversal and use the zones to prepare for a deal.
Also, it is important to remember that this indicator, as any other oscillator, has one substantial disadvantage. When a trend begins in the market, it can send a fairly large number of false signals.