1. Abstract

There are traders who take advantage of daily trading by using filters as early signs before place entry orders.
In my daily work, I have used indicators such an RSI, STOCHASTIC, and others to look for overbought or oversold areas.
Also, volume indicators and DMI to measure the power of the trend before place trades.

But, in my research to find the proper ways to improve my results over the time I have found two indicators that are used on stocks markets but I think could be used in currency markets.

Theory says that these indicators have better results, rather common daily used.
Unfortunate, dukascopy doesn’t have these indicators or I can’t find it on demo or real but could be great to have it to try it.
Let’s have a summary of them:

1.1 Money flow index

This indicator gives to us overbought/oversold areas, taking price and volume as the combination.
The RSI, use close prices by over a period, most common is 14 period.

1.2 Chaikin money flow

This indicator uses today’s prices only to make the calculations.
Volume and MFI indicators use current period with the previous one.

2. Indicator Money Flow index (MFI)

We do not make any calculations on daily trading, platforms give to us the results on the charts easily.
Is very important to know an idea of how it indicator works inside.
At the end, we need to make the proper interpretation of any indicator.

2.1 Calculation method
  • Time frame: Daily
  • Period: 14 days
  • Average price: (High + Low + Close)/3.
  • Raw Money Flow = Average price * Volume of trades by each day.
  • Positive money flow will be positive if the average price is higher than yesterday’s average price.
  • Money Flow Ratio = (14-period Positive Money Flow)/(14-period Negative Money Flow)
  • Money Flow Index = 100 - 100/(1 + Money Flow Ratio)

2.2 Interpretation

The MFI can show us overbought/oversold levels, the index usually moves in the same direction of price and divergences between the MFI indicator and price are significant signals.

By their calculation, MFI can be more reliable than RSI about warning signals of trend change on low volumes because it considers the positive or negative volume flow of money associated and not the only price only.

The levels to take attention are the 80/20, that is if MFI is overbought will be above the 80 level for a period and that means that a correction is going to happen.

If the price is below 20 level, that mean is oversold and a change of price or reversal is going to happen soon.

2.3 Examples

I will put the same time frame on the same pair currency with the indicators on the discussion to see differences.
  • This picture is about RSI indicator, we have two signals. One seems to good in short time but no the second.

  • This picture is about MFI, we have the red lines at the same period and seems to be good. Also, there are few more who could fit even better.

3. Indicator Chaikin Money Flow (CMF)

This indicator uses today’s prices only by the calculations and its functionality is more like to measure market sentiment and have early entry signals. Also, is a momentum indicator.

3.1 Calculation method
  • Time frame: Daily
  • Period: 21 days
  • Price range: ((Close – Low) - (High - Low)) / (High - Low)
3.2 Interpretation

The indicator has a middle point (zero line) and the positive or negative areas.

The positive zone has known as the bullish (sentiment) indication because it represents buying pressure in the upper half of the daily price range.

The negative zone is known as the bearish indication as for the opposite of the positive zone, as weakness.
The values in this indicator are about +0.1, +0.2, +0.3 in the case of positive zones.
The opposite by the negative zones are -0.1, -0.2, -0.3. The extreme range is +-1 and the more significant the values are about +-0.3 or equal or above -+0.2.

The indicator showing change sentiment if the indicator trends up from a positive zone and reaches a peak and then starts to fall to a negative zone, this is change sentiment from positive zone to a negative zone and acts a sell signal.

If the indicator trends down from a negative zone and reaches a peak and then starts to rise to a positive zone, this is change sentiment from the negative zone into a positive zone and acts a buy signal.

The longer the indicator remains in a zone the more consistent the sentiment.

The signals provided by this indicator are more reliable if have divergences with the price moves, rather than the indicator alone.
In range, markets are not recommended take as valid signals of this indicator because are known as false signals.

3.3 Examples
  • This Image is momentum, price above zero means positive or bullish sentiment. The bearish is below the zero zone. We have two who seems to be great signals.

  • This Image is CMF, we have two touches on zero line and then fall down. The signals seem to be good as the momentum indicator.

  • This image is about divergences, note how important are those in combination. Also, there are more divergences.

4. References
  • Roger Kinsky: book charting made simple.
  • Charts: tradingview.com
5. Conclusions
  • MFI could be more reliable than RSI, maybe if it is used on high time frames. Its method of calculation combines price and volume. Signaling trend change on low volumes can be less significance, and this is a real advantage.
  • The simple example between RSI and MFI on one currency pair show us the most effective signal on the MFI indicator.
  • MCF could be more reliable than momentum indicators but combined with divergences. If don’t the false signals are for sure.
I would like your opinion about those indicators based on your trade experience, are best or not ?Thanks by your feedback.
Nice trade.
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