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FX TECHNICAL ANALYSIS


a divergence between the MFI and price and this favors the trade – e.g., market overbought, price trending up, but MFI trending back down – this is even better. The MFI should nonetheless never be used on its own as a trade signaling mechanism, and would be used in conjunction with other indicators, tools, and modes of analysis


to make better informed


trading decisions. Trade Examples


The following provide some trade examples of how the money flow index might be used to identify potential trading opportunities. I have paired it with Keltner channels, which is another price reversal indicator.


The MFI is used with a 14-period setting, while the Keltner channels are set with a 20-period setting and a 3.0x average true range multiple. (The higher the average true range multiple the wider the bands will be, and therefore the more conservative the trade signals will be.)


Given that both the MFI and Keltner channels are price reversal indicators, it doesn’t make sense to plot trend following indicators on the chart in conjunction with them (other than for perhaps general information).


The System We can form a basic trading system


54 FX TRADER MAGAZINE October - December 2018 Fig. 2 - Trade #1 around this.


Long trades will be taken when the following are true:


1. Security is oversold based on the money flow index running below 20


2. Touch of the bottom band of the Keltner channels.


Short trades will be taken when the following are true:


1. Security is overbought based on the money flow index running above 80


2. Touch of the top band of


Keltner channels Exit trades when:


the


1. When price touches the middle band of the Keltner channels (a middle band can be plotted on this indicator by going into the settings on your charting software)


This is simply an example of a basic system that uses


technical


indicators only. It ignores price action, chart patterns, and fundamental analysis.


Money Flow Index + Keltner Channels Work Best on Volatile Securities


All of the following trade examples will be used on Kinder Morgan (KMI) stock. For the money f low index and Keltner channels to initiate signals, the security needs to exhibit a sufficient amount of volatility.


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