Market Facilitation Index Indicator Trading, Set up Strategy

Market Facilitation Index-Indicator In Zerodha Kite3

Market Facilitation Index Indicator or MFI is used to see the strengths and weaknesses of price movements. This indicator’s absolute values alone cannot provide any trading signals, unlike its dynamics in relation to the dynamics of the volume. In this article,

What is the Market Facilitation Index Indicator?

Trader and author Bill Williams invented the Market Facilitation Index indicator. He described it as a measure of market reaction to the new volume level. The indicator does this by looking at how much the price has moved alongside tick volume at the time. And then subsequently assigning a market facilitation value. Bill Williams demonstrates this value as the market’s willingness to move the price.

What is the Formula of the MFI Indicator?

In order to calculate the Market Facilitation Index one needs to subtract the lowest bar price from the highest bar price. And then divide it by the volume.

MFI = (HIGH – LOW) / VOLUME

Here:

HIGH β€” the highest price of the bar;
LOW β€” the lowest price of the bar;
VOLUME β€” the volume of the current bar.

How to Use Market Facilitation Index on Technical Charting Platform?

Here, I will show you the way by which you can apply the Market Facilitation Index on your charting platform. For example, I place Zerodha kite and Upstox pro, the two most popular charting & trading platforms in India.

Use the Market Facilitation Index with Zerodha Kite

First, log in to your Zerodha kite Charting and Trading Platform. Then open any chart of your preferred script. On the charting window, you will find the STUDIES section. There put the name of the indicator and click on it.

Check the MFI indicator in action in the HDFC share price chart.

Market Facilitation Index Indicator In Zerodha Kite

The bars of this indicator is divided into four colors depending on the price movement and the volume. These colors will be described later.

Market Facilitation Index Indicator In Zerodha Kite

Use the Market Facilitation Index with Upstox Pro

In Upstox, also, the process is as same as Zerodha Kite. The customization option is available here like Kite. Just write down the name of the indicator, and hit the apply button.

Upstox Chart

What Do these Color-coded Bars Mean?

So, let’s get into the details into it.

Example

Green Bar –

The green bar in this indicator indicates that the price movement is increasing and the volume is growing. Maximum traders at this point are entering the market and they are trading in the same direction as the price move which causes it to grow in strength. This means that if a trader is looking to enter the trade in the direction of the move now can be a good time. Vice versa, if a trader were looking to trade against the market direction trader, they may want to hold off. This can also apply to open positions as if the indicator is showing movement against the trader’s open position this could be a good time to get out.

Brown Bar (Fade Bar) –

The brown bar in this indicator indicates that there is a weakening of momentum of the price move. This suggested that traders are losing interest in the current move or that the trend is coming to an end. The traders should avoid entering into a position in the same direction as the trend. More time use this bar as an indicator for a market reversal and trade against the starting trend.

Fake Bar (Blue Bar) –

The blue bar in this indicator indicates that the strong move could be due to speculation and not an indication of a trend as it is short-lived. This is not a bar that trader would want to enter into a trade in the same direction as the move. The bar looks at the disconnect between price moves and the volume of trades it took to cause them.

Squat Bar (Pink Bar) –

A pink bar in this indicator indicates a high volume with little price movement caused by traders entering the market in both directions. This can often be a strong move in either direction giving traders the chance to make a quick profit. This indicator also can predict the strength, it cannot predict the direction of the following move.

The MFI or Market Facilitation Index indicator can work with all time frames and all market conditions.

Some Popular Strategies of Market Facilitation Index

  • When Market Facilitation Index increases and volume increases it indicates that a) the number of players coming into the market increases (volume increases) b) And, the new coming players’ open positions in the direction of bar development picks up speed.
  • If the Market Facilitation Index falls and volume falls. It reflects the market participants are not interested anymore.
Market facilitation index
  • Now, when the Market Facilitation Index increases, reversely the volume, falls. It means that the market is not supported by the volume from traders. And the price is changing because of the speculations of the floor traders (brokers and dealers).
  • Lastly, when the Market Facilitation Index falls, but the volume increases. There is a battle between the two bulls and bears. It was characterized by a large sell and buy volume. Here, the price is not changing significantly since the forces are equal.

Key Points on MFI

However, using MFI one will be able to say 3 important things:

  • Whether the current trend is strong enough to trade.
  • When a new trend starts.
  • When it’s better to avoid the current trading.

Conclusion

So, the absolute values of the Market Facilitation index are reflected by the histogram’s bars. And, the comparison of the index and volume dynamics are given in colors that are vital in terms of reading the indicator signs.

Author: Ankita Sarkar

Ankita is a graduate in English language and she has also done her MBA from the Calcutta University. She has a high knack in the stock markets. She is a NISM certified Research Analyst. An experienced stock market content writer Ankita is also trading successfully on her own account.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.