An MFI Trading Strategy That You Should Know About (New for 2020)

In this video I will show you a trading strategy that shows how you can use the

MFI indicator this is mark from trradinformed.com and welcome to this video in

this video I am talking about the MFI indicator or money flow index and this

is the second video in my new series on the MFI indicator if you’d like to check

out the first video that is linked on the screen at the moment and you can do

so in the first video I talked about what the MFI is and how to calculate it

but in this video I am talking about a trading strategy and I am using the SPY

SPDR etf to demonstrate it the reason I’m using the SPY is because there is

lots of historical data it is the oldest ETF it is one of the most widely traded

and there is and it consequently has low cost of trading and lots of

liquidity so the MFI strategy that I’m going to talk about in this video has a

couple of key things firstly of course we’re using the MFI we’re going to be

using a market filter and overall filter to identify long and short trades and

thirdly this trading strategy is designed to get large percentage trades

so it is it’s not a quick trading strategy I’ve had quite a few of those

recently if you want to check out some of my other videos this is a strategy

that takes long swing trades that can be held for pretty long periods of time for

most traders but as a consequence we get some large percentage trades on the

screen at the moment you can see the spy it’s a chart of the spy ETF I also have

volume at the bottom and the MFI indicator here now as I explained in the

previous video the MFI what makes it interesting and different and why more

traders should be aware of it is because it uses volume as part of the

calculation, now the trading strategy that I am going to

introduce is nice and simple but the thing is about simple trading strategies

is it’s always possible to refine them and also there is less to go wrong when

market conditions change and there are two key components for this trading

strategy the first one of these is the linear regression I often use the 200

period linear regression shown on the screen at the moment and I usually use

it in terms of the direction which way is it pointing is it pointing upwards or

downwards now you can see in this market here it is pointing upwards so at this

point here we have an upwardly sloping linear regression I was just to move

this and move it slightly back in time you can see that there is a time period

here when the market is pointing downwards and this is a downwardly

sloping linear regression now I’m only going to take long trades when the

linear regression is pointing upwards and only going to take short trades if I

take them at all when it is pointing downwards and the second part of this

trading strategy is the MFI indicator and I’m using it here with an oversold

line here so I am going to take long trades when the market is coming back

out of an oversold condition and the linear regression is pointing upwards

on the screen I’m showing the backtest model that I’ve used to test this

trading strategy over here on the left in yellow is their historical data this

is the spy ETF historical price and volume data just scroll across you can

see the calculations for the money flow index other calculations used for the

backtest and for the trailing stops and closing and scroll over even further we

have long and short trades now these are the results that I have got with this

trading strategy on I’m just going to check this box so we’re gonna have a

look at long only now the reason and I’m going to explain later while I’m going

to show this strategy as a long only or a long short option and which you would

choose to do it depends on how you think about the markets so quickly I’ve shown

what how we’re entering and exiting I’ve shown how we’re entering the market

using the MFI and linear regression we’re using a fixed fractional position

sizing system and we’re using the percentage to calculate both our stops

and our position sizing you can see here I’ve got a rather large profit target

25% and a still pretty significant stop-loss multiplier so we’re getting

somewhere close to between four and five to one reward to risk focus show over

here we’re also backing this up with 76% winning trades so that is a pretty

little ratio that I’m quite comfortable with I’m not using a trailing stop now

here is the MFI level that I have tested which is 35 so if the MFI comes from

below to above 35 we can take a long trade now the exit this is a strength

exit and this is something if you’ve seen any of my other videos that I often

like to do and this is simply if we have three consecutive higher closes of at

least 0.75

and then we can exit the trade this is a

way of getting out of the market while the goings good while we have an

exuberant market we can take some profits off the table I’ve got a couple

of scenarios here the first of these tests our strength exit we can text

trading the next day open because some people obviously prefer to do that

rather than trade the closing price that’s easy to toggle on and off and you

can see it makes a small difference I’ve already said I’m taking this trading

this long only now let’s have a look at the results in terms of what I was

trying to achieve a lot of high average trade expectancy of nearly 8% which is

very good this means that the cost of trading becomes a much smaller part of

our profits whereas if we had lots of trades and smaller trades, the cost of trading

the cost of the spread the cost of slippage would be a much greater factor

so we’ve actually not got very many trades at all considering the time

period but we have a high number of percentage winning trades and we are

holding on to some of these trades for a long time for most traders to allow a

trade expectancy to allow the trade time to mature if you ever want to hit 25%

profit target especially when you’re trading an index tracker like this

you’re going to need to hold the position for an extended period of time

we’ve got relatively low drawdown considering the size of the stop-loss so

we’ve got 18% over this time period and we’ve got a decent MAR ratio nothing

spectacular but a decent ratio compound annual growth rate of 8% of course this

is always a factor of how much leverage we’re using if we want to increase our

leverage so in other words risk twice as much per trade you can see it makes a

big difference to our annual growth rate whist at the same time increasing

drawdown and how high you want to increase your leverage depends on your

level of risk tolerance you see the underlying market here as well now I

said long and short trades now there’s a very significant thing for long and too

long and short trades if you’re trading equity markets if you’re trading stocks

if you’re trading indices if you’re trading ETFs that are based on either

stocks or indices long and short trades are not often symmetrical because

markets behave differently when they’re going down to when they’re going up so

quite often a index strategy such as this will be long only and that will be

fine when we’re in a bear market we’ll just sit this one out however there is a

way to trade this one short and we can have a look at that by checking this box

here so I’m using a similar but slightly different principle for the short trades

see I’m using exactly the same entry level so I’m using it when the linear

regression is pointing downwards and the MFI falls below this level then we enter

a short rather of this being a retracement entry it becomes more of a

momentum entry you can see the difference here net profit is being

predominantly created by our long trades and we have a higher percentage number

of them trades of number of winning long trade however overall net profit is

higher so when the markets do go down when we have a bear market it is usually

a good idea to be trading short but it is difficult to do so and historically

speaking there are not many bear markets although they loom large you know you

know our minds will always think the next one is around the corner in fact we

haven’t had one for more than ten years so it’s very difficult to test a

strategy that takes into account bear market and looks at good as good

as a long strategy however overall net profit will be greater if we do and when

we come into a bear market generally we want to be trading short in order to

maximize our profits over the long term okay I hope you found this video useful

as I mentioned in the first video if you would like to get a free copy of the MFI

indicator calculations you can do so by clicking on the link and subscribing to

the free tradinformed newsletter if you want more information about trading

the financial markets and in particular about back-testing your trading

strategies please go to www.tradinformed.com