Day Trading Options Strategy using MoneyFlowIndex and DMI Indicators

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.

f2JoU6r.png


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.

nlEMnBy.png


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.

b8tZOsc.png


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.
 
Last edited:
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

 
Last edited:
@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.

 
Last edited:
@BenTen I have a question about this statement "With this day trading strategy, I usually buy weekly in the money (ITM) option."
Do you buy an ITM Call for long and ITM put for short?

And, can this be used for intraday scalping of options? Will it work with the spread in the bid/ask?
 
Last edited:
@barbaros ITM will apply to either direction. This can be used for scalping as well. Just keep in mind that it's been awhile since I use this strategy, so make sure you understand it first and paper trade it before risking your money.
 
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.



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.

f2JoU6r.png


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.

nlEMnBy.png


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.

b8tZOsc.png


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.
Can you please share the script for this or link ? Thanks.
 

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