If you’re wondering, “Volume Flow Indicator (VFI) formula is, and how can it help with forex trading?”, this article will answer your questions and provide an understanding of how it works, how to use it, and why it’s important.

The VFI formula is a popular tool used in technical analysis to measure the flow of volume in a market. 

Traders use it to gauge the strength of a price move, helping them predict potential reversals or trends.

This article will cover everything you need to know about the VFI, its formula, how it’s calculated, and how you can use it to make better forex trading decisions. 

By the end of this article, you will understand how the VFI works and how it can help you become a more informed and successful trader.

What is the Volume Flow Indicator (VFI)?

The Volume Flow Indicator (VFI)  is an indicator that helps forex traders assess the strength of a trend by considering both price and volume. 

Volume, in trading, refers to the amount of a currency pair that is traded during a specific period. Price, of course, is how much the currency is worth at any given time.

So, the VFI tells you how much a price movement is supported by actual trading activity. If the price is going up and there is high volume, it shows that the trend is strong because many people are buying, confirming the price increase. 

On the other hand, if the price is moving up but the volume is low, it could signal that the trend isn’t as strong, and it may reverse soon.

This makes the VFI an important tool for spotting trend reversals and confirming the strength of existing trends. 

Traders use the VFI to decide whether to buy, sell, or hold a position based on how strong they believe the market trend is.

Essentially, it helps traders understand if the market is being controlled by bulls (buyers) or bears (sellers).

The Volume Flow Indicator Formula

To fully understand the Volume Flow Indicator, you need to know how it’s calculated. 

The formula involves several steps. Don’t worry, we will explain each part so it’s easy to follow. Let’s go through it step by step below.

1. Calculate the Typical Price (TP)

The first step in calculating the VFI is to find the Typical Price (TP) for the current period (or candlestick). This is calculated using the high, low, and close prices of the currency pair.

Formula

Typical Price (TP) =  High Price + Low Price + Close Price​ / 3

For example, if the high price of a currency pair is 1.3000, the low price is 1.2950, and the close price is 1.2980, the typical price would be:

TP =  1.3000 + 1.2950 + 1.2980 /​ 3 = 1.2976

2. Determine the Raw Money Flow (RMF)

Once you have the typical price, the next step is to calculate the Raw Money Flow (RMF). This is the Typical Price (TP) multiplied by the volume of the current period. 

Volume, as we discussed earlier, is the total number of units of the currency traded.

Formula

Raw Money Flow (RMF) = Typical Price (TP) x Volume

Let’s say the volume for the period is 200,000 units. Using the typical price from the previous example, the raw money flow would be:

RMF = 1.2976 x 200,000 = 259,520

3. Calculate the Money Flow Multiplier (MFM)

Next, we calculate the Money Flow Multiplier (MFM). The MFM helps us adjust the money flow based on price movement. The formula for the MFM is:

Money Flow Multiplier (MFM) = Typical Price (TP) – Previous TP​ / High Price – Low Price 

The MFM takes into account the difference between the current typical price and the previous period’s typical price and then divides this by the range (high – low) of the current period.

4. Calculate the Money Flow Volume (MFV)

Now that we have the Money Flow Multiplier, we can calculate the Money Flow Volume (MFV) by multiplying the MFM by the volume.

Formula

Money Flow Volume (MFV) = Money Flow Multiplier (MFM) x Volume

5. Calculate the Final VFI

Finally, we calculate the Volume Flow Indicator (VFI) by smoothing the Money Flow Volume (MFV). 

Smoothing is usually done using an Exponential Moving Average (EMA) to reduce the noise and make the indicator more reliable.

Formula

VFI = Smoothed Sum of MFV

By smoothing the MFV, the VFI becomes less sensitive to sudden price movements, giving traders a better view of the overall trend.

What Does the VFI Indicator Tells Traders?

The VFI is designed to help you understand the strength of a trend in the forex market. The general interpretation of the VFI is as follows:

1. Positive VFI Values

When the VFI is positive, it means that the price movement is supported by buying pressure (volume). This suggests a bullish market, where more people are buying, and the trend is likely to continue.

2. Negative VFI Values

When the VFI is negative, it means that the price movement is being driven by selling pressure. This suggests a bearish market, where more people are selling, and the trend is likely to continue downward.

3. Zero Crossings

If the VFI crosses above zero, it can signal the start of a bullish trend. If the VFI crosses below zero, it can signal the start of a bearish trend. 

These zero crossings are considered key signals to help traders spot potential reversals.

4. Divergence with Price

Divergence between the VFI and price is another important aspect to watch. If the price is making new highs but the VFI is not, it can indicate that the trend is weakening and a reversal might be near. 

Conversely, if the price is making new lows but the VFI is not, it can suggest that the downtrend is weakening.

Advantages of Using the VFI in Forex Trading

The VFI offers several advantages for traders looking to improve their trading strategies:

1. Combines Price and Volume 

The VFI is powerful because it combines two important factors, price and volume, into one indicator. This gives you a more complete picture of the market than using just price or volume alone.

2. Helps Identify Strong Trends

By analyzing both price movements and volume, the VFI can help you confirm the strength of a trend. 

If the VFI is showing a strong positive value, it indicates that the price movement is supported by a lot of buying activity, making the trend more reliable.

3. Spotting Potential Reversals

The VFI can help you spot potential reversals by detecting divergences between price and volume. This can give you a head start in adjusting your trading strategy before the market moves too far in the opposite direction.

4. Diverse Application

The VFI can be applied to different forex pairs and trading timeframes, making it a versatile tool that can be used by many different types of traders.

Disadvantages of the VFI in Forex Trading

Like any indicator, the VFI has some limitations:

1. Complex Calculation

The VFI’s formula can be difficult for some traders to understand, especially beginners. The multiple steps involved in calculating the indicator may discourage some traders from using it.

2. False Signals in Volatile Markets

In highly volatile markets, the VFI may produce false signals. For example, during sudden price spikes, the indicator might show strong buying or selling pressure that does not last, leading to a bad trade.

3. Lagging Indicator

Like most technical indicators, the VFI is a lagging indicator, meaning it follows price movements rather than predicting them. This can result in delayed signals, especially when the market is moving fast.

How to Use the VFI in Forex Trading

To use the VFI effectively, follow these practical tips:

1. Combine with Other Indicators

While the VFI is helpful, it’s best to combine it with other indicators like the RSI (Relative Strength Index) or Moving Averages. These indicators can provide additional confirmation of your trade signals.

2. Watch for Divergence

Keep an eye on the divergence between the price and the VFI. This can often indicate that a trend is weakening or about to reverse.

3. Adjust the Smoothing Period

The VFI uses a smoothing period to filter out short-term fluctuations. You can adjust the period to suit the currency pair you are trading or the timeframe you are using.

Frequently Asked Questions

1. What is the best way to use VFI in trading?

The best way to use VFI is to combine it with other indicators like RSI or MACD for better confirmation. It’s also important to observe the direction of the VFI and price trends to make more informed decisions.

2. How reliable is VFI in predicting market trends?

While VFI is a useful tool, it’s not foolproof. It can sometimes give false signals, especially in volatile or low-volume markets. Combining it with other indicators can improve its reliability.

3. Can VFI be used for day trading?

Yes, the VFI is suitable for day trading as it helps identify short-term trends and reversals. However, make sure to combine it with other tools to improve your accuracy.

4. Can VFI be used for long-term investing?

While VFI is mainly used for short-term trades, long-term investors can still use it to spot major trend changes or market shifts. However, it may not be as effective for long-term analysis compared to other indicators.

Conclusion

The Volume Flow Indicator (VFI) is for forex traders who wants to improve their trading strategies by including both price and volume analysis. 

When you understand the VFI formula and how it works, you can better  identify strong trends and find potential reversals