The Modified Money Flow Index (MOD MFI) is a volume/momentum technical indicator that measures the strength of total money flowing into and out of a stock, index or futures contract. MFI calculates from both price and volume activity.
MOD MFI refers primarily to the total value of the shares or contracts being traded. In trading we think in terms of money flowing into or out of a stock or futures contract. When money flows for a prolong period of time we can identify trends. When that money flow changes or reverses after moving to extreme levels we can start monitoring more closely for trend reversals.
Let’s take a look at Barrick Gold (ABX). If using the standard Money Flow Index (MFI) with a 21 setting, we cannot identify anything meaningful in the ABX pullback. If we wanted to buy into this ABX pullback we would need to use some other form of analysis tool to help us better interpret how to better trade the current price. In this instance MOD MFI cannot be used as a primary decision-making technical tool for trading ABX at this time, and it really doesn't give us any secondary consideration insights at this time.
If monitoring money flow is important to you, this is where a MOD MFI approach can be a more helpful indicator. It is a unique calculation that “curve fits” the MOD MFI calculation more to the uniqueness and data pattern being analyzed. It takes a standard MFI calculation and modifies the calculation to a new setting that often can better identify an oversold/overbought conditions or possible reversal setups that a standard 21 setting.
How does a MOD MFI work? MOD MFI is a standard MFI calculation with an optimization routine capable of analyzing used defined data to calculate a more ideal MFI setting for that stock, index or futures data.
The MOD MFI uses for its default setting Pivots = 6 and Type = Medium. To experiment with other settings, go back to the MOD MFI menu and enter other values.
Returning to the earlier Barrick Gold (ABX) example, we will now show how the MOD MFI can offer an alternative to the standard Money Flow Index. Load up MOD MFI for ABX. In this instance the default setting gives us the same results as the standard MFI.
However, the difference is we can go into the MOD MFI and make some small adjustments and our calculation results can change dramatically. If you use a standard MFI we could do the same thing but we would have to spend a lot more time experimenting with various setting changes to generate similar results that the MOD MFI can do quickly for us.
One primary goal for tracking money flow is to identify oversold or overbought conditions. In ABX if we switch the pivot setting from Moderate to Weak pivots yet leave the number of pivots set to a 6 value we quickly find a good alternative where we can overbought/oversold conditions are now easy to identify.
How does the MOD MFI calculation differ from a standard Money Flow Index? The difference is the MOD MFI takes the stock, futures contract or index data and analyzes money flow based on pivot pattern uniqueness and trading behavior.
What are Pivot Points?
Pivot points are support and/or resistance levels on charts that are extremely useful in developing entry or exit strategies in trading. They have been used for decades in technical analysis to identify locations where price swings have occurred in the past. If market is range bound or trending this information can be used to help identify was to trade that behavior.
How EduTrader Uses Pivot Points in the MOD MFI calculation?
The MOD MFI calculates the length of data bars used from one pivot to another. It then adds those data bars up and divides by the number of pivot points used in the calculation to get a new MOD MFI average. In this calculation the actual price pivot point ends up getting counted twice, where it is included in the end of a pivot length calculation, and becomes the beginning data bar to count in the new pivot to next pivot calculation.
Using the Barrick Gold (ABX) example again, we calculate ABX minor pivots and using a total of 6 minor pivots in the calculation. If we add twice the pivot points we get a total of 28 data bars. Divided 28 by 6 (pivots) and we get 4.666m which we round up to 5. This is how come the new MOD MFI picked 5 for its new calculation value.
Using this new setting notice how we can now better identify these minor oversold and overbought Money Flow swing moves. This new information can be more useful to us if trying to trade these minor swing moves because we can now identify the current swing move as an oversold or overbought condition. If we combine MOD MFI with other primary technical analysis tools we will now be able to improve our understanding of the quality or lack or quality in any buy or sell setup we might be considering. The MOD MFI now becomes a more useful secondary supportive technical trading tool.
Menu Functions
Settings
The Default Pivots is 6. This value can be changed by clicking in the respective box and changing the value. The Type of Pivots used can be selected from Weak, Medium, and Strong. As well the Use All Check box can be selected to use all the Pivots.
Display
The Display Type can be set to one of the following options: Line, Line with Bands, Line with Bands and Shading, Line with Shading.
Line
The Color selection allows the user to change the color of the band & the Thickness selector allows the user to change the thickness of the band displayed.
Bands
The default Upper Band is set at 80 while the Lower band is set at 20. These values can be changed by clicking in their respective boxes and changing the values. The Color selection allows the user to change the color of the band displayed.
To save your modified settings to be applied to future charts, click Save As Default. Once this is clicked at all times in the future the settings you have set will be applied to future charts when this study is added.
To return to the Factory Settings, click Factory Settings and then click Save As Default. Once this done at all times in the future the Factory Settings will be applied to future charts when this study is added.
Click Ok to apply the Modified Money Flow Index to the selected chart or click Cancel or Remove to exit the study without applying it.
Click Remove to remove the study from the selected chart.