Using MFI can help you determine many things but most importantly it can help you time your entries and exits very well. As a trader we want to capture the price at its best, whether that is at its peak when selling or at its low when buying. In my opinion the MFI is your best friend when you're intra-day trading.
Here's a 15 minute chart of PFE. I've shown where we bought our calls using the MFI as a guide:
After my order fills I'll utilize the five and one minute MFI to help me find the perfect exit. Here's the five minute MFI of the same chart above:
Sometimes the trade doesn't go as smooth as we'd like. In cases where we find ourselves down on a play and we need to cut it, I recommend utilizing the 1 minute MFI to help guide your exit. Look at the 5 minute chart below and let's play out a scenario:
Now looking at the chart above we see our MFI is very overbought and the price of the stock has jumped up quite a bit this morning. We assume that the price is going to pull back so we wait for a red confirmation candle and then buy a put position.
Now we're down on the trade and it's not looking good. We need to get out before our loss gets too far ahead of us. So what we can do is pull up the one minute chart:
So as you can see we got in and then when we determined the trade was bad and we were down we used the 1 minute MFI to help guide us to the exit. By riding the 1 minute MFI down it allows us to ensure we aren't leaving money on the table when exiting. By doing so we likely prevented a big loss and helped us get back as close as we can to our break-even.
Whatever strategy you use to enter or exit your trades just make sure that it's not based off an emotional response or in the form of panic. Both of these habits can cause unnecessary losses and leave your account steadily dwindling down until there's nothing left to trade.
If you have any questions about using short-term MFI drop a line!