Market Facilitation Index

All technical indicators have an inventor. One of technical analysis’ biggest contributors was Bill Williams, who invented the Market Facilitation Index, among other indicators like the RSI.

You can tell a lot about an indicator from what the inventor has to say about it. As for the Market Facilitation Index, Bill Williams had the following words of wisdom to impart with investors:

“The MFI is a measure of the market’s willingness to move the price. I cannot overemphasize the value of this indicator. It is a more truthful measure of market action than any stochastic, RSI (Relative Strength Index) or other momentum indicator.”

The Market Facilitation Index is a measure of the market’s ability to facilitate trades at various prices.

MFI Equation

You can calculate the Market Facilitation Index with the following equation:

MFI = (High-Low)/Volume

How simple is that? Simply take the difference in values between the market high and market low, and divide it by the amount of volume for the period. This technical indicator is said to be a measure of efficiency, to see the volatility of a currency pair in the forex market divided by the volume leaves us with a certain understanding about how many people are buying and selling at one time.

Bill Williams described the MFI’s value in noting that in periods of rising or falling volume, everyone could know the extent to which short- and long-term forex traders were buying and selling a particular currency.

How to Use the Market Facilitation Index

The MFI is already embedded in popular forex trading platforms such as Metatrader 4 and 5. Applying it to your chart is as easy as grabbing it from the indicators tab within the software package.

Naturally, technical indicators of any sort provide mathematical results to traders. With the MFI, traders shouldn’t care about the value of the calculation, but rather how a calculation of the MFI from one period differs from another.

MetaTrader 4 allows us to set our own colors to better show the changes in the MFI over time. Using the default colors, you’ll see:

1. Green – The MFI reading is rising, and so is volume. Bill Williams referred to this condition as being “Green,” as well.
2. Brown – Actually saddleback brown, the shade of the color isn’t important. When you see brown, know that the MFI is down and volume is up. Williams referred to this as the “fade.”
3. Blue – MFI reading is rising, but volume is down. Williams said this was the “fake.”
4. Pink – The MFI calculation is dropping while volume rises. Williams referred to this condition as the “squat.”

MFI Color Interpretation

There are assumptions that can be drawn from each color in the MFI. Going in order as we have above, we find:

Green MFI bars – Green bars indicate that the market is already forming a momentum trend. Thus, if one were to enter a new position, it should be in the same direct of recent price movements. Those fighting the current trend should close positions. Furthermore, we can conclude from rising MFI and volume that:

• More traders are entering the market.
• New transactional activity favors the most recent bullish or bearish trend.
• Market volatility is rising, since the MFI reading is rising all the while volume is rising.

Brown MFI bars – The MFI turns brown as the MFI drops but volume rises. Known as the “fade,” interest in the current direction may be waning. However, as Williams noted, the “fade,” or brown color, often occurs ahead of serious momentum shifts or surges. Several brown MFI bars in a row may indicate to traders that the next wave of momentum buying or selling is soon to start.

Blue MFI Bars – The blue MFI bars are referred to as the “fake” because any movement that happens during a blue MFI bar period is fake. Movements that happen when the MFI reads blue are more likely to be the result of a small group of large traders, who are placing their own forex conversions for their business, not for speculative purposes. Additionally, blue bars may be market makers or forex dealers who are making market values to flush out short-term speculators. Volume is declining, but volatility is increasing. Those who are buying and selling here aren’t very committed to their trades.

Pink MFI bars – This, according to Williams, is the money maker for traders. Pink MFI bars occur when volume builds without momentum, meaning that more market participants are placing more trades, but the market has yet to pick a movement, up or down. When sellers and buyers clash, the result is a series of flat trading periods until bulls overpower bears, or vice versa. Prepare for a quick, sudden, and profitable momentum-fueled trading event. Williams referred to the Pink MFI bars as being the “squat” because it is the time at which the market price is at rest before a big momentum rally in either direction.