#4 Don’t Ignore Money Flow
The Money Flow Index (MFI) is a momentum indicator that measures the inflow and outflow of money into a security over a specific period of time. It uses price and volume to calculate trading pressure. Arguably, MFI is the purest way to determine the amount of money entering and leaving a particular security or market.
Similar to RSI, the index fluctuates between 0 and 100. In terms of bitcoin, the best way to apply MFI is to use it as a validation tool. Please review the following table.
Using MFI to Confirm a Breakout
|Date||Breakout Level||MFI Reading||Confirmation|
|10.10.2017||4872||62.27||Breakout was confirmed|
|12.01.2017||10932||81.36||Breakout was confirmed|
|12.18.2017||17948||81.92||Breakout was not confirmed|
|12.22.2017||14322||60.84||Breakout was not confirmed|
MFI confirmed the bullish breakout on 10.10.2017 and 12.01.2017. MFI did a great job of invalidating the breakout on 12.18.2017. Additionally, MFI invalidated the bearish breakout on 12.22.2017. Please review chart #4 for more details.
As we discussed previously, these indicators are not perfect. However, taken as a group, they certainly provide an excellent approach to trading bitcoin. The best strategy is wait patiently for all indicators to validate a buy or sell signal. A simple yet highly effective method is to wait for bitcoin to generate a 20 SMA buy or sell signal. However, don’t initiate the trade unless the breakout is confirmed by at least one of the other indicators (preferably all three indicators).
Successful bitcoin trading is certainly possible. However, it requires patience, discipline and a handful of reliable indicators. The indicators are the easy part. The hard part is the patience, discipline and dedication.
#5 Important Bitcoin Trading Strategies
- Buy on a break above the 20-day moving average
- Sell on a break below the 20-day moving average
- Don’t buy a bullish breakout if it’s not confirmed by volume
- Don’t sell a bearish breakout if it’s not confirmed by volume
- Don’t buy a bullish breakout if it’s not confirmed by RSI
- Don’t sell a bearish breakout it it’s not confirmed by RSI
- MFI should be used to verify all new highs and new lows
- The best overall strategy is to combine 20 SMA with volume, RSI and MFI
- Wait patiently for the indicators to validate a buy or sell signal
- Don’t trade until all indicators are pointing in the same direction
#6 Characteristics of Successful Bitcoin Trading
- Bitcoin trading is not a “get rich quick” scheme
- Successful bitcoin trading requires dedication, patience and discipline
- Digital currencies should be viewed as a separate asset class
- There is no perfect method to trading bitcoin
- Each trader should develop her/his own style of trading
- Trend following is the foundation to successful trading
- In terms of moving averages, 20 SMA is the best approach for trading bitcoin
- Traders should use bitcoin volume to confirm a bullish or bearish breakout
- Relative Strength Index (RSI) should be used to validate all breakouts
- Money Flow Index (MFI) calculates the movement of money into & out of a market
- The most profitable trades occur when all indicators are pointing in the same direction
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