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Market facilitation index (MFI)

The MFI indicator measures the strength or weakness behind movements in an asset's price. It helps you decide whether a trend is strong enough to justify trading it and when a new trend may be about to start.

 

The market facilitation index (MFI) is an indicator that measures the strength or weakness behind movements of the price of an asset.

The MFI indicator can help you decide when a price trend is strong enough to justify trading it, when a new trend may be about to start and when to avoid entering trades altogether.

It does this by looking at changes in the size of price moves and whether trading volume is rising or falling.

Colour-coded bars signal the strength of a trend

The MFI indicator uses a system of colour-coded bars to signal the strength of trends in the market.

Different colours tell you whether a trend is gaining or losing strength and whether it is worth trading.

The image below shows how the MFI appears on a chart:

Trading the signals

Depending on their colour, the MFI bars give you the following trading signals based on the relationship between changes in price volatility and in trading volume:

Green (green bar) indicates price moves are growing and volume is up

The appearance of a green bar suggests that there are more traders entering the market in the direction of a current price move and that the move is gaining strength.

This means it may be best to enter any new trades in the same direction as the market. If you have any open positions that are not in line with the current price direction, it may be safer to close them.

The chart below shows how the green bar can confirm a trend direction

  1. The MFI shows a green bar indicating a continuation of the move higher.

The brown bar shows weakening momentum

The appearance of a brown (fade) bar suggests that traders are losing interest in the current price move and that it may be coming to an end.

At this time, it may be best to avoid entering trades in the same direction as a current price move. The appearance of several brown bars in a row may also indicate that the price is about to change direction.

The chart below shows the brown bar showing a potential market reversal.

  1. Market has been moving lower before a brown bar appears signalling a potential reversal.

Fake (blue bar) – price moves are growing and volume is down

The appearance of a blue (fake) bar indicates that there is a disconnect between price moves and the volume of trade. It suggests that strong moves could be the result of one-off speculators having the power to push around illiquid markets. Any price moves are therefore unlikely to last long.

When a blue (fake) bar appears, strong moves may be triggered by speculation only and so may not last long. It might be best to avoid entering new trades now.

Experienced traders tend not to enter the market during this phase, which can be a time when new traders get sucked into the market and experience losses.

The chart below shows what the MFI looks like when the blue bars are on the chart:

  1. The market is undecided about direction as the blue bars form.

Squat (pink bar) indicates price moves are shrinking, but volume is up

The appearance of a pink (squat) bar suggests that traders are very enthusiastic about entering the market, but it is a battle between bulls and bears, meaning the price does not yet have a clear direction.

As soon as either the buyers or sellers win this fight, prices can experience a sudden, powerful move, and traders have the potential to make quick profits from this. However, the indicator will not determine the direction for you.

The chart below highlights the MFI and shows how the market is in a battle between buyers and sellers

  1. Pink bar indicating a battle between buyers and sellers.

Suitable for all time frames

The MFI indicator works well on all time frames, from 5-minute to daily and weekly charts.

Because it actually measures market cycles, the MFI can be used in all market conditions.

 

Summary

In this lesson, you have learned that …

  • … the market facilitation index is an indicator that measures the strength or weakness behind current movements in an asset's price.
  • … it helps you decide when a trend is strong enough to justify trading it, when a new trend may be about to start and when it might be best to avoid trading.
  • … it does this by looking at the relationship between changes in the size of price moves and changes in trading volume.
  • … a system of colour-coded bars then gives you trading signals.
  • … a green bar appears when price moves are growing and trading volume is up – price moves are gaining strength as more traders enter the market. This suggests it may be best to enter trades in the direction of current moves
  • … a brown (fade) bar appears when price moves are shrinking and volume is down – traders are losing interest in the current price move and it may be coming to an end. This suggests it may be best not to enter trades in the direction of current moves
  • … a blue (fake) bar appears when price moves are growing and volume is down – strong moves are the result of low volume and may not last long. This suggests it may be best to enter no new trades.
  • … a pink (squat) bar appears when price moves are shrinking and volume is up – a battle between enthusiastic bulls and bears may trigger a big price move once one side has won.
  • … a pink bar suggests a big price move is coming, but it will not determine the direction for you.
  • … The MFI indicator can work with all time frames and all market conditions.