MFI Indicator description
MFI indicator (fig. 1) – Market Facilitation Index is designed to estimate a price range for a certain period, depending on the volume of Forex trading for a certain time.
Here is its calculating formula: MFI = (High – Low)/Volume, where High is the maximal price for a certain period, and Low is the minimal price for a certain period, Volume is the trading volume.
MFI Forex indicator was developed by Bill Williams, a well-known millionaire trader that supported the use of technical analysis in trading in financial markets, the founder of the famous trading school «Profitunity Trading Group». He is the author of several other indicators, such as Alligator, AO, AC, which he described in his book «Trading chaos». Initially, MFI was used to trade shares in the stock market. But, later, it turned out that it can also be effectively used in the Forex market (full truth about Forex).
The operation principle of Market Facilitation Index is based on the comparison of the dynamics of trading volumes and prices during a certain period. Based on these changes, the trend can be confirmed or disproved. The measurements are made relatively to the previous ratio of the index. So, if MFI is higher than the previous indicator, the prices will rise. The index is associated with volatility that is specific to the asset at the time of measurement. Market Facilitation Index does not give signals to enter or exit trades; it is used as an additional indicator when trading. It can be used on any timeframe.
On the chart MFI is presented in the form of a histogram of the columns, which, depending on the market situation, are painted in green, brown, blue, pink. These are standard colors; a trader can choose others in the trading terminal. MFI is estimated as generating quite a lot of false signals, but in general it gives quite accurate information.
Despite of the fact that MFI is used quite active as a trading tool in Forex trading, and it is a rather simple indicator (how to start Forex trading?). But it is more a market analysis tool, the main task of which is to help a trader to understand the market deeper, to show clearly what moods dominate the market at a particular time.
MFI Indicator on MetaTrader 5 platform
MFI indicator is presented on popular trading platforms in the list of standard instruments. On the MetaTrader 5 platform, it is in the list of Bill Williams’s indicators (fig. 2).
After clicking on the file with the indicator on the chart, the settings window appears where the values of the indicator colors are explained. It does not make sense to change the standard settings of the indicator. So, by clicking «OK» a trader loads the indicator on the chart (fig. 3). When you hover the mouse cursor over the indicator column, you can see the index indicators.
The indicator is located at the bottom of the chart, for example, on fig. 3 you can clearly see the activity of the blue bar of the MFI indicator. If you hover the cursor at it, you can see how the index shows growth, while the trading volume is reduced. This information shows that it is not necessary to open trades; you need to wait for further movement of volumes and changes in the indicators.
You can also understand that, this indicator by itself cannot give information when to enter the market, you need some other oscillators for Forex, such as MACD (fig. 4), which is located below MFI.
MFI Indicator signals
The green color shows the growing index and trading volume, confirming that the market is recovering in the direction of a certain trend – the number of transactions increases and, if a trader entered the market, the index will confirm the correctness of his actions.
The green color on the downtrend shows that the fall can be significant, and, conversely, on the uptrend the green color indicates that the price growth will be significant. The green color often corresponds to the impulse price change. The brown color shows a drop in the indicators, respectively, to reducing of the volumes. Traders close positions and exit trades. This bar is also called «fading».
It can be formed when the price reaches a maximum or minimum, when market participants are not interested in buying or selling, volatility falls, but at the same time the situation may change and you need to be ready to have time to open a position at the very beginning of the trend formation. Several brown lines indicate an imminent trend change.
The blue color shows that trading volumes are decreasing with the growth of market activity, this is a deceptive signal, and it is also called «false». You should neither focus on it, when assessing the situation in the market, nor open trades on it. It shows a contradiction between increasing the activity despite the decrease in volumes that, according to B. Williams, can inform about manipulative nature of the price movement.
Pink color shows the end of the trend – volumes are growing, but MFI is declining, reflecting the confrontation between buyers and sellers. It’s also called a «squat», as if before the jump – this color suggests that the big players are probably accumulating positions. Also, this bar completes the impulse movement. The breakthrough in the direction of continuation or reversal of the trend shows, what the end of this bar will be.
Based on the information of the squat bar, you can assess the situation correctly and enter the market at the optimal moment. Also you need to use other indicators, because MFI is not informative enough. Bill Williams offers in his book «Trading chaos» to use MFI with the indicators MACD, fractals and Fibonacci levels. The indicator is actively used in strategies with Elliott waves.
Trading strategies based on MFI
One of the strategies with MFI is to focus on the pink bar. The chart shows that, generally, the pink bars of MFI indicator correspond to the points of the beginning of the trend reversal (fig. 5).
The trader focuses on the indicator, assesses the further movement of the trend, while he is placing orders for both buy and sell that are close to the extremes of the pink bar of the indicator. After execution of one order, the other one is canceled, if the indicator forms a green bar, it confirms the correctness of the trader’s actions.
In this case, the indicator allows a trader to enter the trades before the trend was formed, MFI worked as a leading indicator. You can trade using only MFI, but you should remember that it is an unreliable strategy. It would be appropriate to use additional tools to determine the point of entry into the auction more accurately.
For example, such a tool can be a moving average. The strategy means that MFI confirms the moving signals. To implement the strategy, you need to load MA on the chart, set the required period in the indicator options dialog box (fig. 6).
The trader notes when the price crosses MA from top to bottom, it is assumed that the trend changes that is confirmed by a pink bar. You should place a sell order below the local minimum. If the situation is reversed, the price crosses MA from bottom to top, and the orders are placed above the local maximum. This strategy uses stop losses.
MFI can be used, for example, with the volume indicator Volumes (fig. 7).
For trading quite a long timeframe is selected. It is believed that the combined use of these indicators provides very correct information about the market situation in advance. If a strong uptrend is seen on the chart, a green bar is formed on MFI, and a green bar is also formed on the indicator Volumes, a trader can open a deal to buy. In this case, a green bar of MFI can even act as a signal, although in other cases it only confirms the correctness of the trader’s conclusions regarding the direction of the trend.
Bill Williams suggested using a strategy with Elliott waves and MACD. In this strategy, if a pink bar of MFI is in the predicted target area of Elliott wave, and at the same time MACD shows divergence, almost certainly, it means a trend reversal. Therefore, Bill Williams believed that in this case, you can put an order to buy a little above the maximum, and for sale – a little below the minimum and wait for the direction of the trend reversal. This strategy is recommended on timeframes from 4H.
Another strategy with MFI for short-term trading involves assessing the situation on other Williams’s indicators. On the chart are added tools «Parabolic», «Moving averages», «Alligator» (fig. 8). The signal to enter the trade is determined by the formation of a pink bar on MFI, and other indicators confirm or deny this information.
The strategy is used on any timeframe, but it is preferable to timeframes from 4H, as there are more false signals on the shorter ones.
Three indicators at once forming sort of a one whole trading instrument, are used in the next strategy. The standard indicators CCI, MFI and OBV (fig. 9) are supposed to show the maximum values that is a signal to open and close a position, as the entry point is formed very clearly at the intersection of the indices of the three indicators.
There is also a very simplified strategy that is used on some currencies on the candlestick chart, in which only green MFI bars are used. Entry into the trading is carried out when forming a green bar, taking into account, what kind of the candle is formed, bearish or bullish, and the corresponding transaction is opened.
The strategy requires significant trading skills, because it shows a lot of false signals, but their number decreases with the use of additional indicators. Also, this strategy requires prior practice on Forex demo account and selection of a suitable trading pair.
MFI indicator is a standard indicator of a number of tools developed by Bill Williams. It is a tool mostly for analyzing the market situation, but it is also actively and effectively used when trading on Forex together with other indicators, as MFI does not show the optimal entry points into trading.