Market Facilitation Index (MFI) Indicator – Interpretation & Signals

The Market Facilitation Index (MFI) is a technical indicator developed by Bill Williams which analyzes the change in the price of a financial asset in connection with its trading volume, ie analyzing the change in price for each volume unit.
In much simpler words, the Market Facilitation Index (MFI) is an indicator based on the trading volume in the market. The difference between the MFI and the traditional volume indicator is that it does not take into account variations in prices, it only takes into account the number of shares or contracts that are traded in a market. The market facilitation index goes further. That is, it takes into account price variations and, at the same time, the volume traded. When added to the price chart it looks like this:

Market Facilitation Index indicator

As we can see in the candlestick chart above, the indicator is similar to the traditional volume indicator. In addition, it changes colors. The bar can be pink, blue, green or brown. These colors are indicative colors and offered by default in the Metatrader trading platform. Next we will see how the MFI is calculated, what each color means and how we can trade with this indicator. The Market Facilitation Index is commonly found in most trading platforms such as Metatrader 4 and Metatrader 5. On these platforms is shown in a separate window below the price chart:
Market Facilitation Index for MT4

How is the Market Facilitation Index indicator calculated?

Calculating the market facilitation index is quite simple. We can calculate it manually without major problems. However, trading platforms, such as the one mentioned above, can calculate this indicator automatically. In this sense, knowing how it is calculated will help us to interpret it later.
MFI = (High of the period – Low of the period) / Volume traded in the period
Therefore, we have that in this formula each variable represents the following:
  • Maximum: It is the highest value reached by the price during a certain period.
  • Minimum: It is the lowest value reached by the price during a certain period.
  • Volume traded: It is the volume traded during a certain period.
  • Period: The period to which we refer can be 1 minute, 5 minutes, 1 hour, 1 day, 1 month, etc.
For example, suppose a trading session on a certain asset. Let’s assume that this asset is the price of the futures contracts on gold. The maximum marked that day is $ 1,100 and the minimum value is $ 1,050. The number of contracts negotiated amounts to 250,000 contracts. The period studied is one day. Thus, the market facilitation index would be: MFI = (1,100 – 1050)/250,000 = 50/250,000 = 0.0002 This value, depending on the asset, is usually multiplied by 1,000 or 10,000 to obtain a value that is easier to interpret. However, as we will see now, what is important about this indicator is not the absolute values. Before moving on to the next point, let’s see why the indicator bars appear in one color or another:
  • Green bar: MFI increases and volume increases.
  • Brown bar: MFI falls and volume increases.
  • Blue bar: MFI increases and the volume falls.
  • Pink bar: MFI falls and the volume falls.

Trading with the Market Facilitation Index

A priori, this indicator is not used alone. Its creator, Bill Williams, considers it to be a very important indicator but uses it integrated into his trading system. In any case, it is vitally important to know that the important thing is not the absolute values of the indicator. The important thing is the colors it adopts. Knowing this, let’s see how it is interpreted and what trading signals it can offer. The interpretation is made based on the color that the indicator takes.
  • Green bars: MFI and volume increase at the same time. That is, the asset is clearly moving in one direction (bullish or bearish) and the volume is increasing. It is a good time to add long positions (if the market trend is bullish) or short (if the market trend is bearish). For example:

Green bar of MFI indicator

  • Brown: MFI falls and volume increases. Which means that the asset has no significant movements. There is a fight between buyers and sellers. It is not advisable to take any position.
Brown bar in MFI indicator
  • Blue bar: MFI increases and volume falls. The market is clearly moving in one direction, but no new investors are joining (volume drop). Taking positions is not recommended.

Blue signal of MFI indicator

  • Pink bar: IFM and volume drop at the same time. When this color appears it is a sign that the trend may be about to end. It is advisable to close positions and get out of the market.

Pink bar indicator

As we have seen in the examples of each bar color, the signals are unreliable. Many times they indicate something that is not actually happening. That is why Bill Williams used the MFI as a confirmation tool. By itself it does not give trading signals. However, if we want to use this indicator to trade as well as a confirmation tool, we can apply the following rules:

Trading signals with the Market Facilitation Index

Based on this indicator we can define the following rules to trade in the market:
  • When the BW MFI and Volume rise at the same time, this means that the market moves primarily in one direction and more investors are participating in this movement, so it is a good time to enter the market.
  • When BW MFI and volume declines at the same time, this means that the interest of investors starts to fall. This commonly occurs at the end of a trend.
  • If the volume is decreasing while the BW MFI is rising, this is a clear sign that the market moves primarily in one direction but there are no new participants to increase the volume level, so the price movements are result of speculation.
  • If the volume is rising while the BF MFI is going down, this is an indication that a battle is developing between buyers and sellers (as shown by the high volume transaction) and that both forces are so well matched that there are not significant changes in the price. Typically, this occurs before there is a significant movement in the opposite direction. For this reason, the trader must pay attention to the direction of the price movement once the breaking of the congestion zone occurs. Bill Williams calls this condition “squat bar”.

 More information on technical analysis and indicators here: Forex technical analysis

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