Anyone use MFI?

[LisaM]

Seems to be quite a few choices for determining if something is overbought/oversold. What do you guys prefer and why?

[Arindam]

Lisa,

By ‘MFI’, I’m guessing you meant the ‘Money Flow Index’, which – to quote from StockChart’s Chart School-- is “A volume-weighted version of RSI that shows shifts is buying and selling pressure.” There are plenty of other indicators that combine ‘price’ and ‘volume’ to suggest whether stocks are under accumulation or distribution, which is a different thing than --though related to-- “over-bought/over-sold.”

My suggestion is to go to your favorite charting site. Build a chart, apply every indicator in their menu several at a time, and then choose the ones that you think are providing the signals they should be providing. Swap in a different stock and see if your choices still make sense. Keep swapping in stocks until you find a set of indicators and parameters that does a good enough job, most of the time, which is as good as it’s going to get, because nothing works all of the time.

The choice of indicators is as much a matter of aesthetics as utility. So pick whatever you want and then learn their nuances.

[LisaM]

Oh I see. I will try experimenting with them like you suggest. Thanks!

[Arindam]

Lisa,

A while back, you asked if anyone used the MFI indicator. I didn’t, but I hadn’t yet answered for myself why not. So, just now, I plotted four volume indicators to re-examine the matter. The ticker doesn’t matter. But let’s use ENPH, because it’s the sort of ‘follow-the-crowd’, over-bought stock that’s just a ‘trade’, not an “investment”, and it’s crashing yet again for some very obvious fundamental reasons.

The second panel is raw, uninterpreted volume. The third panel is the very uninformative MFI indicator. The fourth panel is the On Balance Volume indicator, a classic tool whose use and interpretation is obvious. The fifth panel is the Chakin Money Flow indicator (that isn’t worth digging into). The sixth panel is Elder’s Force indicator, which I like. So, let’s drop Vol, MFI, and CMI and set the lookback for OBV and FI the same.

Now that the cross-overs are nearly the same, let’s plot another stock to see what other differences there are between the two.

As the rate of price incease decreases, the plot for the Force indiator declines as well. Thus, FI also speaks to ‘momentum’. But if you want ‘simple’, the On Balance Volume indicator would be the way to go.

[LisaM]

Thanks, I see how MFI is less useful.

[paulfoglia]

Over the years, I’ve tried many different indicators. I’ve found many interesting, and useful in specific instances. Still over time I’ve returned to the simplest, as I find them most reliable, and candidly, the easiest to understand. So I mostly watch RSI, and occasionally, MACD, OBV, and STO. The issue of course is a confirmation bias, as these tend to be variations of the same information.

Here’s a chart showing $NVDA with both RSI and MSI. To my eye, comparing it to RSI the introduction of the volume into the equation (MFI) has not changed the indicator in a meaningful way; it’s not given me different information… But… of course this is just one chart. There are times when a stock bursts up/down on big volume and then the MFI produces outsized differences.

I’ll also add that as a big fan of RSI, in this chart, the divergences in the Jun/Jul timeframe were strongly pointing towards some sort of retracement. Is that simply consolidation before the next big run upward? Perhaps. I lack confidence that $NVDA will do well in the short term, based on the RSI (and MFI) indicators.