Day Trading Options Strategy using MoneyFlowIndex and DMI Indicators

BenTen

BenTen

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There is nothing better than a simple day trading strategy, especially for scalpers. Here I'm using two indicators that can be found right inside ThinkorSwim. The two indicators are Money Flow Index (MFI) and Directional Movement Index (DMI).

A Quick Breakdown

1. Money Flow Index which is often known as MFI will show me when a stock is oversold or overbought.
2. Directional Movement Index (DMI) is a momentum indicator which will show which direction of the stock is stronger. Is it the downside or upside?

How to Day Trade Options Profitably using MFI and DMI

First thing you want to do is add the two indicators. As mentioned earlier, they can be found within the Studies section in ThinkorSwim. For my personal use, I like to tweak the Directional Movement Index a bit.

My Modification of DMI:
  • Remove ADX
  • Change DI+ to green
  • Change DI- to red
An additional step that I would take is changing the candles from regular to Heiken Ashi. Also, switch to the 3 minute (3m) timeframe.

You'll have something like this.



When to Buy and Sell?

There are 2 conditions you have to always keep in mind.

1. When MFI is below 20 = oversold
2. When MFI is above 80 = overbought

When either condition is met, there is a potential short/long in place. You can choose to short when a stock is overbought or buy calls when a stock is oversold.



What's DMI For?

If MFI is so good at showing overbought or oversold, then why do we need DMI for? Well, you can choose to use just the Money Flow Index indicator alone, but sometimes, it could be misleading. This is when DMI will come up and help.

When DMI create a huge gap between the DI+ (green) or DI- (red), then we know it's ready to reverse.

When the DMI lines are super close to each other, it means we have a sideways action going on.

Here is a great example of how DMI can be extremely helpful.



From the image above, MFI showing Apple was overbought. Furthermore, DMI also show that there is a huge gap between red and green DMI. This confirms that a reversal is going to happen. You don't want to trade when DMI is close to each other. Again, that indicates the stock is going to go sideways.

Which option should I buy?

With this day trading strategy, I usually buy weekly in the money (ITM) option.

Give it a spin and let me know how it goes.
 
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Chenthy73

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Good indicators. thanks for sharing the details of this method you use.

 
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Topas

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Very nice and simple strategy to follow ... Thank you. I will test it out differently. Now I do Nadex Binary Option and my question is How Should I implement this on Nadex option ? Such as What time frame, expiration Time Approx. and ITM Range or ATM ? I usually do ATM at the range of 45-55 / R&R 1:1



Thanks for all these good work and helping traders.

Keep up the good work. God Bless

 
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BenTen

BenTen

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@Topas Hey, I have never heard of Nadex Binary Option until now. I'm not sure what kind of trading you do on there. For me personally, I would use the 3m and 5m timeframe with the indicators mentioned above.

As far as option contracts, I would go ITM or ATM. Depending on how expensive and what kind of stock I'm looking at, I may also consider OTM as well, but that's very rare for this kind of strategy.

 
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jan_angel

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Hi BenTen - I ran into kind of similar strategy for daytrading options. But I am not very tech savy. So wanted to see if someone here can help out to create a strategy using the following and also add a WL column:

Strategy uses five indicators:

• Bollinger Bands - Use the 12,2,2 as parameters, i.e. (12) as the Simple Moving Average (SMA) and Standard Deviation, (2) as the standard deviation of the top band, and (2) as the standard deviation of the bottom band. A trade is made when the current price action move below the bottom band (calls) or above the top band (puts),

• Relative Strength Index - use a length of twelve (12).

• Intraday Momentum Index – use range of 12.

• Money Flow Index –

• Full Stochastic Oscillator (do not use only the Fast or Slow Stochastic) - Readings above 80 act as an overbought signal while readings below 20 act an oversold signal. The parameters I prefer to use are (10,6,6) for daily trading.

Entry happens when all of the below happen:

Bollinger Bands- bottom or top is reached or is past it.

RSI- (30) = buy calls/ (70) = buy puts

IMI- (30) = buy calls / (70) = buy puts

MFI- (20) = buy calls/ (80) = buy puts

FSO- (20) = buy calls/ (80)= buy puts.

Exit is set at around a dollar from entry.

The strategy was mentioned by Kevin O'Brien in seeking alpha article...and acc to author has very good success rate:

https://seekingalpha.com/article/296636-profiting-daily-with-cf-industries

 
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jan_angel

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Perfect! Thank you for directing me to this script. I will try it out.

 
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