The Market Facilitation Index (MFI), created by Dr. Bill Williams, is a volatility indicator which aims to determine the willingness of the market to move the price. The indicators absolute values alone are of no use to the trader as they provide no trading signals. Instead, it derives its significance from its use as a tool to analyze the price movements efficiency by combining price and volume.
By computing price movement per volume unit, the BW MFI can help you decide when a trend is strong enough to safely trade it, when a new trend is forming or when to avoid entering the market. It allows you to determine whether the market is liquid and if the different types of market players are active. If market activity drops, then market players using the MFI can see that volume and price movement efficiency are decreasing.
The Market Facilitation Index (MFI) is the creation of Bill Williams. The indicator endeavors to establish the effectiveness of price movement by computing the price movement per volume unit. This is accomplished by subtracting the day’s low from the high and dividing the result by the total volume.
The market facilitation index (MFI) is an indicator that measures the strength or weakness behind movements of the price of an asset.
The MFI indicator can help you decide when a price trend is strong enough to justify trading it, when a new trend may be about to start and when to avoid entering trades altogether.
It does this by looking at changes in the size of price moves and whether the trading volume is rising or falling.
The absolute values of the Market Facilitation index are represented by the histogram’s bars while the comparison of the index and volume dynamics are given in colors which are vital in terms of reading the indicator signs.
● Green bar – both MFI and volume are up. Increasing trading activity means market movement acceleration. We may join the trend.
● Blue bar – MFI indicator is up, volume is down. The movement is continuing although the volume has dropped. The trend will soon be reversing.
● Pink bar – MFI indicator is down, volume is up. The slowing down movement while volume is raising may indicate a possible break through, often a U-turn.
● Red bar – both MFI and volume are down. The market is no longer interested in the current direction and is looking for signs of a future development.
To calculate Market Facilitation Index you need to subtract the lowest bar price from the highest bar price and divide it by the volume.
The Market Facilitation Index methodology offers only 4 possible combinations of price and volume.
● MFI value and volume grow synchronously. It means that the number of the transactions made by traders increases and happens the active movement of the market in the direction of a trend. New players add the volumes to the market in hope for continuation of a tendency.
● If before that position had already been opened against the market − they are recommended to close.
● If the trader managed to open the transaction on a trend before emergence of green bar, then this situation only confirms the correctness of the accepted trade decision.
Note: However, for the first entry into the market this bar of the histogram is useless, the optimal point of the market has already been missed and it is very risky to open a deal.
The appearance of three green bars in a row means that the market is overbought or oversold and it is worth waiting for an active price turn.
The situation occurs when the volume and indicator values fall simultaneously. Bill Williams called this bar «withering bar».
Players lose interest in the current trend, preferring to close positions, the dynamics of prices slows down.
«Withering bar» often appears on top of the first wave of Elliott (see Using Graphic Tools).
Note: It is not recommended to open new deals in such a market. A few brown bars in a row − wait for the trend reversal.
Blue («false») Bar
This bar appears during the decrease in trading volume against the backdrop of the rising prices. It signals about weak movement in a direction that for some reason is not supported by trade volumes. The price moves by inertia at the expense of small participants.
Note: There is a high probability of speculation or currency interventions. Before finding out the reasons for such strange behavior of the price, it is recommended to abandon new trades.
Pink («squatting») Bar
It appears most often at the end of a protracted trend. Market activity is increasing, but volumes are declining. There is a struggle between «bulls» and «bears», many transactions are being made, but − in different directions, so there is no clear price dynamics. There can be several such bars in a row.
The market is going to make the strong movement − either in the direction of a trend, or against it; it is necessary to look for confirmation from additional indicators (see Using Indicators).
If the «squatting bar» matches PIN bar, or is in an expected target zone of the current wave of Elliot, and at the same time on the MACD indicator there is divergence, then the probability of a turn reaches 95%.
Inexperienced traders are not recommended to open deals when a pink bar appears. If the volume starts to grow on subsequent bars and a green bar appears on the BW MFI histogram, you can open the transaction in the direction of the current price movement.
MFI at Forex market is often used as an additional filter in the zone of the strong price levels, as well as for the analysis of volumes in complex strategies.
Let’s consider some options how to use the characteristic features of the indicator’s histogram.
Strategy on the «pink» bar
We remind: the «squatting bar» of the histogram of BW MFI carries out a role of a compressed spring − the market accumulates energy before the strong movement (volume grows, but the price does not move yet).
Once Bill Williams proposed an elementary trading strategy:
After the appearance of the «squatting bar», you need to set the postponed warrants of SellStop and BuyStop 2-5 points below/above the boundaries of the last closed candle.
StopLoss − is obligatory.
As a rule, one of the orders is opened already at the next bar and then the price continues to move, at least 2-3 bars. This is quite enough to «take» a profit of 10-30 points. After one of the postponed warrants opens, the second warrant needs to be deleted.
Indicators required: Market Facilitation Index and Volume (Tick or Real), timeframe M30.
It is assumed that if the BW MFI is growing, but volumes are decreasing, then this is a sign of a stable trend.
● For BUY: the price is a green bar with small shadows, MFI is the blue bar, MFI’s growth relative to the previous bar is more than 20% (or better − 30%!). The sign of quality is a candle with a body larger than the sum of the shadows.
● For SELL: the price is a red bar with small shadows, MFI is the blue bar, the MFI drop in relation to the previous bar is more than 20-30%.
● StopLoss for purchase: (LowPrice − (High-Low) / 3); for sale (HighPrice + (High-Low) / 3).
Strategy of a volume scalping
One more scheme of the Market Facilitation Index and Volume indicators (Tick or Real) usage. We will configure MFI so that only the sharp growth of volume (green bar) will be displayed. Depending on the direction of a candle on which there is a green bar MFI, we define the direction of the transaction − we sell or we buy, StopLoss is set below/above a signal candle.
However, what this means is:
Such system will generate too many false signals. It is not important for the MFI indicator how much the previous volume has decreased − by 1 tick or 100 ticks − it will «draw» a green bar in any case.
Therefore, for the more accurate assess to the market’s interest, a Volume indicator is added to the strategy. We open the transaction, only if the MFI signal is additionally confirmed by the dynamics on the volume histogram.