Last Updated on February 25, 2020 by Mark Ursell
This MFI trading strategy is designed to give you large winning trades. This strategy is perfect for people who are patience and willing to wait for the best opportunities.
The MFI (Money Flow Index) is a fascinating technical indicator that combines price and volume. I always recommend learning how an indicator is calculated. See my article to learn more about the MFI: What is the MFI Indicator?
Read the Video Transcript
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 stoploss 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 stoploss 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 backtesting your trading
strategies please go to www.tradinformed.com
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