What does an MFI below 20 mean for cryptocurrencies?

When the Money Flow Index (MFI) drops below 20 in crypto trading, it signals oversold conditions, suggesting potential reversal opportunities—especially when confirmed by volume, support levels, and bullish candlestick patterns.

Aug 02, 2025 at 12:15 am

Understanding the Money Flow Index (MFI) in Cryptocurrency Trading

The Money Flow Index (MFI) is a technical oscillator that measures the flow of money into and out of a cryptocurrency over a specified period, typically 14 days. It combines price and volume data to assess buying and selling pressure. The MFI ranges from 0 to 100, with values below 20 generally interpreted as oversold conditions. When the MFI drops below 20, it suggests that the asset may have been sold excessively and could be due for a reversal or bounce. This threshold is widely used by traders to identify potential entry points in downtrends.

The calculation of MFI involves several steps:

• Compute the Typical Price for each period: (High + Low + Close) / 3.
• Determine Raw Money Flow: Typical Price multiplied by volume.
• Identify whether the money flow is positive or negative by comparing the current Typical Price to the previous one.
• Sum positive and negative money flows over the lookback period (usually 14).
• Calculate the Money Flow Ratio: (Sum of Positive Money Flow) / (Sum of Negative Money Flow).
• Derive the MFI: 100 – [100 / (1 + Money Flow Ratio)].

When the resulting value falls below 20, it signals weak buying momentum and strong selling pressure.

Interpreting MFI Below 20 in Crypto Markets

In the volatile environment of cryptocurrencies, an MFI reading below 20 often indicates that a digital asset has been oversold. This does not automatically imply an immediate price reversal, but it does suggest that selling momentum may be exhausting. Traders watch for this level to anticipate potential bottoming patterns or accumulation phases.

For instance, if Bitcoin experiences a sharp decline over several days accompanied by high volume, the MFI might plunge below 20. This scenario reflects intense selling activity. However, if the price begins to stabilize or form higher lows while the MFI remains below 20 or starts to rise, it could signal a bullish divergence—a strong hint that downward momentum is weakening.

It’s crucial to note that MFI readings below 20 are more reliable when confirmed by other technical indicators such as RSI, moving averages, or support levels. Relying solely on MFI can lead to false signals, especially during prolonged bear markets.

How to Use MFI Below 20 for Entry Signals

Traders can use an MFI below 20 as part of a broader strategy to identify low-risk entry points. The process involves multiple layers of confirmation:

• Wait for the MFI to drop below 20 on a 14-period setting.
• Confirm that the price is near a known support level, such as a previous swing low or a Fibonacci retracement zone.
• Look for candlestick reversal patterns like hammer, bullish engulfing, or morning star.
• Check for declining volume during the downtrend, indicating reduced selling pressure.
• Monitor for MFI turning upward from below 20, which suggests renewed buying interest.

For example, on Binance or TradingView, a trader might set up an alert for MFI < 20 on Ethereum. Once triggered, they inspect the chart for confluence with horizontal support around $1,800. If a hammer candle forms with shrinking volume and MFI begins climbing, it strengthens the case for a long position.

Common Pitfalls When Interpreting Low MFI Readings

Despite its usefulness, the MFI below 20 can produce misleading signals, particularly in trending markets. In a strong downtrend, an asset can remain oversold for extended periods. For example, during the 2022 crypto bear market, Solana (SOL) saw MFI drop below 20 multiple times without sustained reversals. Each bounce was short-lived, leading to losses for traders who acted solely on the MFI signal.

Another risk is volume distortion. Some low-cap altcoins experience irregular volume patterns due to wash trading or low liquidity. This can skew the MFI calculation, making it appear oversold when it’s not reflective of genuine market sentiment.

Moreover, timeframe dependency plays a critical role. An MFI below 20 on a 1-hour chart may indicate a short-term dip, while the same reading on a weekly chart suggests deeper structural weakness. Traders must align their MFI analysis with their trading horizon.

Combining MFI with Other Indicators for Better Accuracy

To enhance reliability, traders often combine MFI with complementary tools. One effective method is pairing MFI with Bollinger Bands. When price touches the lower band and MFI is below 20, it increases the probability of a mean reversion.

Another powerful combination involves MACD and MFI:

• MACD histogram shrinking while MFI is below 20 suggests weakening bearish momentum.
• A MACD crossover above the signal line concurrent with MFI rising from below 20 adds confirmation.

Volume-weighted moving averages, such as the VWAP, can also help. If price is near VWAP in a downtrend and MFI is below 20, it may indicate a fair value retest. Institutional traders often use this confluence to enter positions.

On TradingView, users can create a custom template with MFI (14), RSI (14), and EMA (20) to scan for oversold conditions with trend alignment.

Practical Example: Analyzing MFI on a Crypto Chart

To illustrate, consider Cardano (ADA) on a daily chart:

• ADA drops from $0.60 to $0.40 over three weeks.
• Volume increases during the decline, pushing MFI down.
• MFI reaches 18, signaling oversold status.
• Price forms a doji candle at $0.38, a historical support level.
• MFI begins to rise toward 25, showing early momentum shift.
• RSI also moves above 30, confirming weakening bearish pressure.

A trader might place a limit order at $0.38 with a stop-loss at $0.35. The combination of MFI below 20, support confluence, and reversal candle provides a structured setup.

Frequently Asked Questions

Can MFI stay below 20 for a long time in crypto?

Yes, especially during strong bear markets. Assets like Dogecoin or Polygon have seen MFI remain under 20 for weeks. This reflects sustained selling pressure and does not guarantee a rebound.

Is MFI equally effective across all cryptocurrencies?

No. MFI works best with high-volume, liquid assets like Bitcoin or Ethereum. Low-volume altcoins may generate false signals due to manipulated or erratic volume data.

Should I buy immediately when MFI drops below 20?

Not necessarily. It’s safer to wait for confirmation signals such as price stabilization, bullish candlestick patterns, or MFI turning upward. Entering prematurely can result in catching a falling knife.

How does MFI differ from RSI in crypto analysis?

While both are momentum oscillators, MFI incorporates volume, making it more sensitive to capital flow. RSI uses only price, so MFI can provide earlier warnings of exhaustion in trending moves.