How to spot hidden bullish divergence with the MFI in crypto?

Hidden bullish divergence in MFI occurs when price makes a higher low but MFI forms a lower low, signaling weakening bearish momentum and potential uptrend continuation.

Aug 06, 2025 at 12:50 pm

Understanding the Money Flow Index (MFI) in Cryptocurrency Trading

The Money Flow Index (MFI) is a momentum oscillator that measures the flow of money into and out of a cryptocurrency asset over a specific period, typically 14 days. Unlike the RSI, which only considers price, the MFI incorporates both price and volume, making it a more comprehensive tool for detecting shifts in market sentiment. The MFI ranges from 0 to 100, with readings above 80 generally indicating overbought conditions and below 20 suggesting oversold levels. However, for spotting hidden bullish divergence, traders must look beyond these thresholds and focus on price and indicator movement discrepancies.

The core idea behind MFI is that volume precedes price. When volume increases during up days and decreases during down days, it signals strong buying pressure. The calculation involves several steps: first, determining the typical price for each period using the formula (High + Low + Close) / 3. Then, calculating raw money flow by multiplying the typical price by volume. Next, positive and negative money flows are identified by comparing the current typical price to the previous one. The money ratio is derived by dividing the sum of positive money flow by the sum of negative money flow over the chosen period. Finally, the MFI is computed as:
100 – [100 / (1 + Money Ratio)].

This detailed process ensures the MFI reflects not just price direction but also the strength of that movement through volume. In crypto markets, where volatility and volume spikes are common, this added layer of insight is critical when searching for early reversal signals like hidden bullish divergence.

What Is Hidden Bullish Divergence in MFI?

Hidden bullish divergence occurs when the price of a cryptocurrency makes a higher low, but the MFI indicator forms a lower low. This setup suggests that despite the price holding up relatively well, selling pressure is diminishing, and buyers are starting to regain control. It is called “hidden” because it often appears during an uptrend, signaling a potential continuation rather than a full reversal.

Unlike regular bullish divergence (which appears at the end of downtrends and signals a major trend reversal), hidden bullish divergence acts as a pause or pullback within an ongoing uptrend. For example, if Bitcoin pulls back from $60,000 to $55,000 and then rallies to $58,000, forming a higher low, but the MFI during the second low registers a lower value than during the first low, this indicates weakening downward momentum. The disconnection between price strength and indicator weakness is the key signal.

Traders should confirm this pattern across multiple timeframes. A hidden bullish divergence on the 4-hour chart that aligns with similar signals on the daily chart increases reliability. It’s essential to note that divergence alone is not a trade signal; it merely highlights a potential shift in momentum that should be combined with other confirmation tools.

Step-by-Step Guide to Spotting Hidden Bullish Divergence with MFI

To identify hidden bullish divergence using the MFI, follow these steps:

• Open a cryptocurrency charting platform such as TradingView or CoinGecko and select your asset (e.g., Ethereum, Solana).
• Apply the MFI indicator with a 14-period setting to the chart.
• Identify a clear uptrend by observing a series of higher highs and higher lows in price.
• Look for a pullback where the price forms a higher low compared to a previous correction.
• Check the corresponding MFI values at both the earlier low and the current higher low.
• Confirm that the MFI reading at the current higher low is lower than the MFI reading at the prior lower low.
• Ensure that volume during the pullback shows signs of contraction, reinforcing weakening selling pressure.

For example, if Ethereum drops to $3,000 (Low A), rebounds, and later dips to $3,100 (Low B), that’s a higher low. If MFI was at 25 during Low A and drops to 20 during Low B, that’s a lower MFI low — a classic hidden bullish divergence. This mismatch suggests that although the price didn’t fall as far, the underlying selling momentum has weakened, hinting at a potential resumption of the uptrend.

Using Volume and Candlestick Patterns for Confirmation

While MFI divergence provides a strong signal, it should not be used in isolation. Volume analysis is crucial because MFI is volume-weighted. A genuine hidden bullish divergence should occur alongside declining volume during the pullback, indicating reduced bearish conviction. If volume spikes on down moves, it may invalidate the divergence.

Additionally, candlestick patterns at the higher low can offer confirmation. Look for bullish reversal patterns such as:

• Bullish engulfing candles, where a green candle completely covers the body of the prior red candle.
• Hammer or inverted hammer formations, which show rejection of lower prices.
• Inside bars followed by a breakout to the upside, indicating consolidation before continuation.

For instance, if Solana forms a hammer at the higher low and the MFI shows a lower low, the confluence strengthens the signal. Overlaying moving averages, such as the 50-period EMA, can also help. If price holds above the moving average during the pullback, it supports the idea of trend continuation.

Common Mistakes When Interpreting MFI Divergence

Many traders misinterpret MFI signals due to timing and context errors. One common mistake is confusing hidden bullish divergence with regular bullish divergence. Applying hidden divergence signals in downtrends leads to false entries. Always verify that the broader trend is upward before acting.

Another error is ignoring divergence duration. Short-term divergence on a 5-minute chart may be noise, especially in low-liquidity altcoins. Focus on higher timeframes like 4-hour or daily charts for more reliable signals.

Overreliance on MFI without considering market context is another pitfall. During major news events or exchange outages, volume can distort MFI readings. Also, in extremely volatile conditions, MFI may remain overbought or oversold for extended periods, making divergence less meaningful.

Lastly, failing to wait for confirmation candles increases risk. Entering a trade immediately after spotting divergence can lead to losses if the price continues to drift lower. Always wait for a bullish close above a recent swing high or a break of a descending trendline.

Frequently Asked Questions

Can hidden bullish divergence appear on all cryptocurrencies?

Yes, hidden bullish divergence can occur on any cryptocurrency as long as there is sufficient volume and price activity. It is more reliable in major assets like Bitcoin and Ethereum due to higher liquidity and clearer trends. Low-cap altcoins with erratic volume may produce false signals.

How do I adjust the MFI period for better divergence detection?

The default 14-period MFI works well for most cases. However, for shorter timeframes, reducing it to 10 can increase sensitivity. For daily charts, increasing to 20 may smooth out noise. Always backtest changes on historical data before live use.

Should I use MFI divergence on lower timeframes like 5-minute charts?

While possible, MFI divergence on 5-minute charts is prone to false signals due to market noise. Scalpers may use it with strict risk management, but swing traders should prioritize 1-hour and higher timeframes for more accurate readings.

What other indicators complement MFI divergence?

The Relative Strength Index (RSI), volume profile, and moving averages work well with MFI. Combining MFI divergence with a rising volume profile at support or a bullish RSI crossover enhances signal reliability.