A technical indicator that attempts to assess the “efficiency” of market moves by comparing price action with volume.
Overview
This indicator was constructed using an interpretation of formulas from the Technical Analysis of Stocks & Commodities magazine June 1994, article “The Market Facilitation Index”, by Gary Hoover and an interpretation of bar colors from the Technical Analysis of Stocks & Commodities magazine August 1996, article “The Market Facilitation Index”, by Thom Hartle.
“The Market Facilitation Index (MFI) is one indicator that synthesizes both price and volume analysis. The MFI is the ratio of the current bar’s range (high-low) to the bar’s volume.
The MFI is designed to gauge the efficiency of price movement. The efficiency is measured by comparing the current bar’s MFI value to the previous bar’s MFI value. If the MFI increased, then the market is facilitating trade and is more efficient, implying that the market is trending. If the MFI decreased, then the market is becoming less efficient, which may indicate a trading range is developing that may be a trend reversal….”
The Market Facillation Index on a daily USD/MXN chart 4/18/2011
Source: VT Trader
Interpretation
In his book “Trading Chaos”, Williams identified four types of trading sessions: Fakes, Fades, Squats, and Greens.
Lowered volume with a rising MFI is known as a “Fake.” There is no real foundation for market move so the price eventually reverses itself.
A “Fade” is lowered volume with a declining MFI. The market participants are losing interest so expect the price to move in the opposite direction.
When volume is up while the MFI is down, the condition is referred to as a “Squat.” Movement after the squat gives a clue to future direction.
When volume and the MFI are both up, the situation is “Green.” This is a strong signal to follow the trend.
This indicator allows the user to choose from 3 different indicator plots. The final MFI plot is displayed over VOLUME bars instead of coloring the price bars in the chart. (See below)
1) Market Efficiency Where:
+1 = increase
-1 = decrease
0 = unchanged
2) Market Facilitation Comparison Where:
1 = + Volume, + MFI
2 = + Volume, – MFI
3 = – Volume, + MFI
4 = – Volume, – MFI
3) MFI Colored VOLUME Bars Where:
+Volume, +MFI = Green bar -> Green Color
+Volume, -MFI = Squat bar -> Red Color
-Volume, +MFI = Fake bar -> Dark Grey Color
-Volume, -MFI = Fade bar -> Blue Color
