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The market facilitation index indicator was created by trader and author Bill Williams, who described it as a measure of market reaction to a new volume. He does this by observing how the price moved along with the tick volume at that time, and then subsequently assigning the value of facilitating the market. Bill Williams called this value market readiness for price action. Bill Williams also created the accelerator oscillator, awesome oscillator, gator oscillator and alligator indicator which help to form his trading strategy template that is readily available in the popular MetaTrader platforms.
What is the Market Facilitation Index indicator?
The market facilitation index indicator looks at two things, price and volume. Bill Williams argued that increasing or decreasing volume tells you a lot and that we should be interested in how the market reacts to volume changes. One of the original names that Bill Williams gave to this indicator was “tick distance” because it is a measure of the distance traveled by the price about volume. That is the change in price per tick.
In the end, he settled on the currently well-known designation of the market facilitation index (MFI), but it remains just a measure of the range in volume.
Market Facilitation Index calculation
Settlements for MFIs are very simple. First, you determine the range for the observation period (i.e., subtract the minimum period from the maximum period). Then you divide this range value by the tick volume for the period. This is shown in the following equation:
- Calculate the typical price: (high + low + close) / 3
- Calculate the raw money flow: typical price x volume
- Calculate the money flow ratio: (14-period positive money flow) / (14-period negative money flow)
- Calculate the MFI: 100 – 100 / (1 + money flow ratio)
How to use the Market Facilitation Index indicator?
The popular MetaTrader online trading platform has a whole set of Bill Williams trading indicators, which are part of the standard tools built within the platform. You will find the market facilitation index listed in the Bill Williams folder in MT4 navigator, as shown in the image below:
You can set the colors of the bars on the MFI histogram as you like, but other than that, there are no parameters to set. Each color represents a different combination of how the MFI compares with the previous bar and how the volume compares with the previous bar. We will discuss this in detail in the next section. The image below shows the GBP/USD 4-hour chart, on which we applied the market facilitation index indicator. MFI Forex values are displayed below the main price chart:
The main use of the MFI is to compare a bar with the immediately preceding bar to analyze whether conditions are more or less favorable for trading. Let’s now look at what the multi-colored bars of the MFI indicator tell us about the market.
Market Facilitation Index strategy
Most technical analysts will agree that volume change is the key signal we should look for. The MFI indicator gives an idea of how the market reacts to changes in volume. Looking at how the MFI indicator compares with the previous bar, combined with how the volume has changed compared to the previous bar, you can get a better picture of what is happening.
There are four possible combinations between MFIs and volume:
- Both MFI and volume expand
- Both MFI and volume are reduced
- MFI increase and volume reduction
- MFI decreases and volume increases
Bill Williams argued that when MFIs and volume increase compared to the previous bar, the market moves in the same direction, and the number of market participants grows. Thus, an increase in the volume of ticks and an increase in MFIs is seen as a strong signal to continue the trend, a combination that Williams called green light for market movement.
The increase in volume suggests that money enters the market. An increase in MFIs implies an acceleration in price movement. In such circumstances, Williams recommended going in the direction of the market. Not surprisingly, the default color for this combination is the green bar in the MT4 MFI indicator.
Conversely, when the MFI and volume decrease, what Williams called “extinction.” The market has lost enthusiasm for the price movement, and nothing special is happening. This lull in movement, of course, represents a gap or a pause between two market movements, and, therefore, may portend the beginning of a new buildup of momentum. The default color for attenuation in MT4 is a brown stripe.
The third item on our list of combinations is the growth of MFIs while volume decreases – Bill Williams called it “fake.” The market appears to be promoting movement in a certain direction. Still, it is not supported by volume (or it may just be the result of low volume, given that volume is the denominator in the MFI equation). Price movements at this time should be viewed with some skepticism, as the movement is not backed up by volume. MFI up with volume down appears as a blue bar in MT4.
The final combination, in which we see an increase in volume, but with a decrease in the MFI, is called a “squat.” Williams suggested that this combination indicates a serious struggle between bears and bulls, with a large volume, but without an obvious price movement. While the battle is going on, the direction is somewhat uncertain, without a clear winner. Someone must ultimately win, and a squat can signal the imminent resumption of a previous trend or a new trend in the opposite direction.
Squatting means that the market has squatted, but was ready to jump. Squats are pink in MT4. You will notice that in our list of permutations for the first and last combinations (green or squat), the volume increases depending on what you see. Thus, an increase in volume is usually a signal that this may be an opportunity for trading. The MFI indicator helps us information about the market, but its use as a standalone indicator is quite limited.
Most indicators become much more useful when used in combination with other tools as part of a common system. Bill Williams recommended using the MFI indicator in combination with his fractal indicator. Even so, you may need the help of other forex indicators and forex analysis to provide more information.
For example, a moving average or a combination of moving averages can help confirm the presence and direction of a trend. Although MT4 comes with a good starting line of indicators, there are a huge number of indicators available online.
Market Facilitation Index indicator conclusion
The market facilitation index indicator was designed to take simple aspects of market action – changing the price and volume of ticks and translating them into clear and concise terms. These terms, as we have seen, give an idea of what the market is doing and what it is going to do next.