MFI Binary Options Indicator
The MFI binary options indicator shows how investors feel about a security and how much money is flowing in and out of the asset. This review will serve as a tool kit for understanding what the Money Flow Index (MFI) means and how to use it in signalling strategies for binary options trading. It will also list the advantages and disadvantages of using the MFI binary options indicator with examples explained.
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MFI Binary Options Indicator Summary
Binary options indicators are tools that help traders identify trends in underlying markets, such as stocks, forex and cryptos. They essentially allow investors to make more informed trading decisions and market predictions.
The Money Flow Index (MFI) is defined as a number between zero and 100. The value, its link with the price of the asset, and how the value changes over time, are used as indicators to gauge the amount of buying and selling pressure on an asset and the likelihood of a trend changing.
How Is The MFI Value Calculated?
The final value of the MFI binary options indicator is reached via inputs in four steps:
- The MFI calculates each period’s average high, low, and closing prices
- The typical price calculated in the first step is then multiplied by its volume to calculate the money flow
- The sum of the money flow of periods experiencing rising prices is divided by the sum of the money flow of periods experiencing falling prices. This is the money ratio
- The final result is divided by 100 (1 – money ratio).
The value of the MFI binary options indicator is always between 0 and 100. A value close to 100 indicates multiple periods of money flowing into the asset. A value close to 0 indicates multiple periods of money flowing out of the asset.
Significant values include:
- 100 indicates money moving into an asset for every period
- 0 indicates money flowing out of an asset for every period
- 33 indicates that there are twice as many periods of money flowing out of an asset than there are of money flowing into an asset
- 66 indicates that there are twice as many periods of money flowing into an asset than there are of money flowing out of an asset
- 50 indicates that the number of periods where money is flowing out of an asset is equal to the number of periods where money is flowing into an asset
The best way to learn how to use the MFI indicator to trade binary options is through an example.
In this example, a trend strategy is used with an M1 time frame on a stock asset. The MFI is used alongside two exponential moving averages (EMA), one with 10 periods and one with 30. This is to have a long (30 periods) and short (10 periods) moving average. EMA10 acts as the first signal to open an option.
If the fast EMA crosses the slow EMA, this is a break. It signals that you could open a position. If it crosses from the bottom up, you may want to purchase a call option. Typically, the MFI will consolidate this move by moving below the bottom band and indicating the asset is oversold.
If the fast EMA crosses the slow EMA from the top down, you may want to purchase a put option. This is consolidated by the MFI moving above the 80 bands – indicating that the asset is overbought.
These are arguably the safest times to make a move. Making moves when there are no crosses – i.e. during a flat, may only be attempted by more experienced binary options traders. This is due to signals being weaker, increasing the chances of making an error.
What Does The MFI Binary Options Indicator Signal?
- The direction of price movement – A higher MFI binary options indicator value suggests money is flowing into an asset, meaning demand is stronger than supply. The price is likely to rise. A lower MFI suggests the opposite, so prices are more likely to fall. Binary options traders can purchase call or put options contracts accordingly.
- Divergence – This is a rare occurrence when the MFI binary options indicator signals a divergence from the trending price movement. A divergence is spotted when the MFI stops mirroring the market. If the binary options trader can spot a divergence early enough, they may be able to generate decent profits.
- When assets are overbought or oversold – This comes from the idea that when the MFI binary options indicator value is very close to 0 or 100 it indicates that something out of the ordinary is happening within the market, which is when investors can make returns. When the value is above 80 (some binary options traders may use 90 or 95 for a more accurate view), the asset is overbought; when it is below 20, it is oversold. Binary options traders predict the market will turn around in both events as gaps tend to close.
Benefits Of The MFI Binary Options Indicator
- Reading the MFI binary options indicator does not require years of training or weeks spent studying high-level books, classes, videos or PDFs – it can be understood in a relatively short space of time, along with some practice
- Apps like Stock Screener allow you to download MFI charts on your iPhone or Android (APK) device for free meaning you can monitor market signals on the go
Risks Of The MFI Binary Options Indicator
- Trends indicated by the MFI binary options indicator are short-term and can change quickly with variable results
- The MFI binary options indicator alone is not always enough to accurately predict market trends. But it can be used in connection with other binary options indicators to reduce the chance of errors
How To Set Up A Binary Options Trade With MFI Indicator
First, register with an online broker. Spectre.AI, Pocket Option and Quotex all offer binary options to UK traders. Some key factors to consider when choosing a brokerage are the payouts they quote, the range of underlying assets they offer, as well as the platforms they support and the range of technical indicators that can be used. Spectre.AI offers the MFI binary options indicator, for example. However, you can also view live charts through a third-party, public provider, such as MetaTrader 4 (MT4) with keyboard extensions.
The chart image below shows the stock price movements of IBM on the New York Stock Exchange with the MFI binary options indicator plotted below it. If you watch between 7/10/2022 and 12/10/2022, the stock approached a period of being oversold. Traders using the MFI as an indicator may have felt this movement will end so could have invested in a high option.
Importantly, the MFI of this asset primarily mirrors price movements, suggesting there has been no divergence in the past month. Generally, when binary options traders notice a divergence, they would tend to invest in the option where the gap closes. This is the easiest to spot but is also quite rare.
Note, deciding when the best time is to begin a binary options trade and in which direction to do so is difficult if you only use the MFI. Using multiple indicators will help with this as it can clarify your prediction on price movements and help you estimate how long trends will last.
MFI binary options indicators can be used in conjunction with a group of other indicators. It is common for them to be used alongside the EMA to predict not only the trend but how long the trend can be expected to last. Additionally, it can be used with other price reversal indicators, such as the Klinger volume oscillator, to filter false signals.
Look out for divergences. Although rare, they can offer the highest returns as they will usually converge back to mirroring the price. Therein lies the opportunity for profit.
Bottom Line On Trading Binary Options With The MFI
Using the MFI for binary options trading can be an exciting way to identify market trends. Although it is challenging to consistently make accurate moves from the MFI alone, alongside other indicators it can prove useful. Beginners can practice using the MFI indicator in a binary options demo account until they feel confident putting their own money on the line.
Can The MFI Binary Options Indicator Make Me Rich?
All trading indicators and strategies can be lucrative for investors if used correctly, and the MFI binary options indicator has many benefits. However, it needs to be used diligently in conjunction with other indicators to be useful and reduce the chances of losing money.
Does The MFI Binary Options Indicator Work On NinjaTrader?
Binary options are not provided by NinjaTrader. However, NinjaTrader does offer the MFI indicator for analysing markets and assets. Alternatively, Spectre.AI offers binary options trading and supports the MFI indicator with straightforward registration.
Should I Make A Call Trade If The MFI Indicates The Stock Is Oversold?
This is generally the idea when an asset is oversold. However, the MFI indicating an oversold asset should not be the only consideration taken before placing a trade. If the MFI signal is consolidated by other price reversal oscillators, then it is safer to make the trade.
Who Is The MFI Binary Options Indicator Suitable For?
Beginners can confuse the simplicity of the MFI binary options indicator with it being an easy way to make money, but this is not always the case. This is because it often needs a well-thought-out and tested strategy, after using multiple indicators, for it to be successful.
Can I Use The MFI Binary Options Indicator On Forex Trades?
Yes, MFI binary options indicators are available to use on underlying forex markets. Simply check your binary platform supports the Money Flow Index indicator on its platform, and that it offers major, minor or exotic currency pairs.