How to read the bottom divergence of the MTM indicator? How to confirm the momentum recovery signal?

The MTM indicator signals a bullish reversal when price hits a lower low but MTM forms a higher low, confirmed by increased volume and bullish patterns.

Jun 02, 2025 at 06:07 am

The Money Flow Index (MFI), often referred to as the Money Flow Indicator (MTM), is a momentum indicator that measures the inflow and outflow of money into a security over a specific period. It is used to identify potential reversals in price trends through divergence analysis. In this article, we will explore how to read the bottom divergence of the MTM indicator and how to confirm the momentum recovery signal.

Understanding the MTM Indicator

The MTM Indicator combines price and volume to measure buying and selling pressure. It ranges from 0 to 100 and is often used to identify overbought and oversold conditions. A value above 80 typically indicates overbought conditions, while a value below 20 suggests oversold conditions. The MTM can also be used to spot divergences, which occur when the price of an asset moves in the opposite direction of the MTM indicator.

Identifying Bottom Divergence with the MTM Indicator

Bottom divergence occurs when the price of an asset makes a lower low, but the MTM indicator fails to make a corresponding lower low. This type of divergence can signal a potential bullish reversal. To identify bottom divergence, follow these steps:

• Select the Time Frame: Choose the appropriate time frame for your analysis, such as daily, weekly, or monthly charts.
• Plot the MTM Indicator: Add the MTM indicator to your chart. Most trading platforms allow you to easily add this indicator.
• Identify Price Lows: Look for two consecutive lows in the price chart.
• Compare MTM Lows: Check if the MTM indicator forms a higher low between these two price lows.
• Confirm Divergence: If the MTM indicator shows a higher low while the price shows a lower low, you have identified a bottom divergence.

Confirming the Momentum Recovery Signal

Once you have identified a bottom divergence, it is crucial to confirm the momentum recovery signal before making any trading decisions. Here are the steps to confirm the signal:

• Watch for Price Action: Look for a bullish candlestick pattern, such as a hammer or a bullish engulfing pattern, near the second price low.
• Check Volume: Ensure that the volume increases during the potential reversal. Higher volume can confirm the strength of the reversal.
• Use Additional Indicators: Consider using other technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD), to confirm the momentum recovery. Look for bullish signals in these indicators as well.
• Wait for a Breakout: Confirm the momentum recovery by waiting for the price to break above a significant resistance level or a trendline.

Practical Example of Reading Bottom Divergence

Let's consider a practical example to illustrate how to read bottom divergence with the MTM indicator. Suppose you are analyzing the daily chart of Bitcoin (BTC) and notice the following:

• First Price Low: On January 15, the price of BTC reaches a low of $30,000.
• First MTM Low: On the same day, the MTM indicator reaches a low of 15.
• Second Price Low: On February 15, the price of BTC reaches a lower low of $28,000.
• Second MTM Low: On the same day, the MTM indicator reaches a higher low of 20.

In this scenario, you have identified a bottom divergence because the price made a lower low while the MTM indicator made a higher low. To confirm the momentum recovery signal, you would follow these steps:

• Watch for Price Action: Look for a bullish candlestick pattern near the second price low on February 15. Suppose you find a bullish engulfing pattern.
• Check Volume: Confirm that the volume increases during the potential reversal. Suppose the volume on February 15 is significantly higher than the average volume.
• Use Additional Indicators: Check the RSI and MACD for bullish signals. Suppose the RSI shows a bullish divergence and the MACD line crosses above the signal line.
• Wait for a Breakout: Wait for the price to break above a significant resistance level, such as the $30,000 level. Suppose the price breaks above $30,000 on February 20.

Common Mistakes to Avoid

When using the MTM indicator to identify bottom divergence and confirm momentum recovery signals, it is essential to avoid common mistakes that can lead to incorrect trading decisions. Here are some common pitfalls to watch out for:

• Ignoring Volume: Failing to consider volume when confirming a momentum recovery signal can lead to false positives. Always check for increased volume during potential reversals.
• Overlooking Other Indicators: Relying solely on the MTM indicator without considering other technical indicators can result in missed opportunities or false signals. Always use additional indicators to confirm your analysis.
• Acting Too Early: Jumping into a trade too early, before confirming the momentum recovery signal, can lead to losses. Always wait for a clear breakout or confirmation before entering a trade.

Real-World Application in Cryptocurrency Trading

In the cryptocurrency market, the MTM indicator can be particularly useful due to the high volatility and trading volume of digital assets. For example, when analyzing the price of Ethereum (ETH), you might notice the following:

• First Price Low: On March 1, the price of ETH reaches a low of $1,500.
• First MTM Low: On the same day, the MTM indicator reaches a low of 18.
• Second Price Low: On April 1, the price of ETH reaches a lower low of $1,400.
• Second MTM Low: On the same day, the MTM indicator reaches a higher low of 22.

In this case, you have identified a bottom divergence. To confirm the momentum recovery signal, you would:

• Watch for Price Action: Look for a bullish candlestick pattern near the second price low on April 1. Suppose you find a hammer pattern.
• Check Volume: Confirm that the volume increases during the potential reversal. Suppose the volume on April 1 is significantly higher than the average volume.
• Use Additional Indicators: Check the RSI and MACD for bullish signals. Suppose the RSI shows a bullish divergence and the MACD line crosses above the signal line.
• Wait for a Breakout: Wait for the price to break above a significant resistance level, such as the $1,500 level. Suppose the price breaks above $1,500 on April 5.

Frequently Asked Questions

Q: Can the MTM indicator be used for short-term trading?
A: Yes, the MTM indicator can be used for short-term trading, but it is essential to adjust the time frame and settings to suit your trading strategy. Shorter time frames, such as hourly or 15-minute charts, can be used to identify short-term divergences and momentum recovery signals.

Q: Is the MTM indicator effective in all market conditions?
A: The effectiveness of the MTM indicator can vary depending on market conditions. It is most effective in trending markets where price and volume movements are more pronounced. In sideways or choppy markets, the MTM indicator may generate more false signals, so it is crucial to use additional indicators and confirmation techniques.

Q: How can I avoid false signals when using the MTM indicator?
A: To avoid false signals, always use multiple technical indicators to confirm your analysis. Pay close attention to volume and price action, and wait for a clear breakout or confirmation before entering a trade. Additionally, consider using other tools, such as trendlines and support/resistance levels, to validate your signals.

Q: Can the MTM indicator be used in conjunction with other momentum indicators?
A: Yes, the MTM indicator can be used in conjunction with other momentum indicators, such as the RSI and MACD, to enhance your analysis. Combining multiple indicators can help confirm signals and reduce the likelihood of false positives.