To analyze Money Flow Index (MFI) divergences for trading, focus on price movements and the MFI indicator. A divergence occurs when the price moves in one direction, but the MFI moves in the opposite direction. This indicates a potential trend reversal. Bullish divergence happens when prices form lower lows, but the MFI forms higher lows. Bearish divergence occurs when prices form higher highs, but the MFI forms lower highs. These signals can help identify buying or selling opportunities.

What is the Money Flow Index (MFI)?

The Money Flow Index (MFI) is a momentum oscillator that uses both price and volume to identify overbought or oversold conditions. It ranges from 0 to 100 and is used to determine whether an asset is being accumulated (bought) or distributed (sold). Readings above 80 indicate overbought conditions, while readings below 20 indicate oversold conditions. The MFI helps traders assess the strength of a trend based on the volume of trades.

What are MFI Divergences?

MFI divergences occur when the price moves in one direction, but the MFI moves in the opposite direction. These divergences suggest a potential reversal in price trends. A **bullish divergence** happens when the price forms lower lows while the MFI forms higher lows, indicating weakening selling pressure. A **bearish divergence** occurs when the price forms higher highs, but the MFI forms lower highs, suggesting weakening buying pressure and the potential for a price decline.

How to Identify Bullish Divergence with MFI?

Bullish divergence with MFI occurs when the price forms lower lows, but the MFI forms higher lows. This suggests that the selling pressure is weakening, and a price reversal to the upside may be imminent. To spot a bullish divergence, look for a downtrend in price, while the MFI indicator shows an upward trend in its lows. This signals that buying interest is increasing despite falling prices, a potential buying opportunity.

How to Spot Bearish Divergence with MFI?

Bearish divergence with MFI occurs when the price forms higher highs, but the MFI forms lower highs. This suggests that buying pressure is weakening, and a price reversal to the downside may occur. To spot a bearish divergence, look for an uptrend in price, while the MFI indicator shows a downward trend in its highs. This signals that selling pressure is building up, despite rising prices, which could lead to a potential selling opportunity.

How Reliable Are MFI Divergences in Predicting Trend Reversals?

MFI divergences are generally reliable, but like all technical indicators, they are not foolproof. Divergences indicate potential trend reversals, but they may not always result in a reversal. Sometimes, price can continue in the same direction despite a divergence. To increase reliability, combine MFI divergence signals with other indicators, such as trend lines, moving averages, or RSI, to confirm the signal before making a trade decision.

How to Confirm MFI Divergences with Other Indicators?

To confirm MFI divergences, use other momentum or trend-following indicators. For example, you can combine MFI with Relative Strength Index (RSI) for added confirmation. If both indicators show a divergence, it strengthens the case for a trend reversal. Additionally, trend lines or moving averages can help you identify the overall direction of the market, ensuring the divergence aligns with the broader trend.

What Are the Common Mistakes When Trading MFI Divergences?

Common mistakes when trading MFI divergences include acting on the signal too early or without proper confirmation. Another mistake is ignoring market trends—divergences in strong trends may lead to false signals. To avoid this, always wait for the price to confirm the reversal by breaking key levels, such as support or resistance, before entering a trade.