Volume is one of the most popular indicators for traders and - as we have already mentioned - can prove to be very useful, especially in the individual value area. As the volume is not calculated from the price itself, it can therefore also be considered as additional information. This fact is very important to many traders.
Based on the volume, some indicators have developed, such as the on-balance volume (OBV) or the money flow index (MFI). The MFI indicator is a further development of the OBV indicator. In order to understand the indicator, we first explain how the OBV indicator works.
Simply explained on-balance volume
The on-balance volume indicator is calculated quite simply. The retail sales for the current day are negative if the price has fallen compared to the previous day, i.e. the closing price is lower. It is positive if the price has increased compared to the previous day, i.e. that is, the closing price is higher. This enables a statement to be made as to whether money has flowed from the share or into the share. The whole thing is accumulated over the course of time, which results in a rising or falling OBV indicator.
The greatest weakness of the indicator is its delayed responsiveness. Strong volume peaks mean that the indicator needs a longer adjustment time, so that the informative value is limited during this time. The lower weekly chart of the DAX futures shows this fact. The indicator was unable to show the larger correction, but fluctuated slightly. However, he confirmed the continuation of the upward trend very well.
The money flow index simply explained
The money flow index is a further development of the OBV indicator. When calculating the indicator, it is not only the closing prices of price bars that are compared, but the difference between the average prices. It shows not only the cash flow, but also the momentum of the cash flow.
The momentum is, so to speak, the momentum of a movement or the expression of the momentum. This allows conclusions to be drawn about the strength of a trend and the underlying cash flows.
Promo video of Olymp Trade
A strategy with the MFI indicator
We now want to illustrate how such an analysis with the MFI indicator Indicator can look like. Based on our findings, we define a few rules:
- To buy a call option, the MFI indicator must be above 60.
- To put a put option buy, the indicator must be below a value of 40.
- Trend breaks within the indicator are traded.
- Calls are only bought if the upward trend is strong (price>200 moving average).
- Puts will only be bought if the downward trend is strong (price<200 moving average).
- The exit (possibly if the option is sold prematurely) takes place as soon as a divergence between the price and MFI indicator is displayed.
It can be seen that after applying these rules on a weekly basis, good trades would also have taken place. The first trade not executed would not have met all the requirements. Although the 200 moving average shows a downward trend, we should buy a put option. However, the trend break in the indicator takes place above the 60 line, and the 40 MFI line is only triggered briefly.
The second trade would have been clearer: A trend break above the 60 line was identified and simultaneously found the price is above the 200 moving average. A long-running call option would have made a good profit here. The vertical line shows where an exit could take place - if a divergence becomes visible. The MFI indicator shows a lower high, while the price has formed a higher high.
The third and fourth trade would also have turned out to be a winning trade if the trading with the MFI indicator had clearly taken place, This is where the advantage of binary options becomes visible. Because if you do not have to choose an exit yourself, but a term, you are on the safe side, so to speak. With this strategy, a duration of four to eight weeks would be recommended.
The volume has always been a popular indicator. The OBV and MFI indicators use the volume in connection with the price. While the OBV indicator continuously adds volume, the MFI indicator puts volume in relation to the average difference between successive closing prices. It thus represents the momentum of the volume.
It should be noted, however, that the volume as a basis - whether for a further developed indicator or as independent information - can develop its effect especially with individual values. In very liquid markets such as indices or currencies, the indicators are less suitable on a short-term basis, but are definitely useful on a weekly basis.
The broker stockpair is very well suited for the use of this strategy, since it mainly focuses on individual values and pairs specialized.