Understanding Market Facilitation Index: A Trader’s Guide to Market Dynamics

Here is an indicator that utilises both price and volume variations to identify market momentum. The Market Facilitation Index is unique because it has the capability to address limitations of ordinary indicators. If you are a crypto trading enthusiast and wish to achieve success in trading, it is essential to learn about this indicator. Let’s delve into understanding the Market Facilitation Index. 

1. Market Facilitation Index: What’s It

The Market Facilitation Index is a powerful indicator which can help crypto traders to understand how strong price movements are, based on how trading activity is happening. The indicator measures the strength of price movements relative to the volume. It looks at whether the market is getting more or less intense, regardless of whether prices are going up or down. 

1.1. The History of Market Facilitation Index

The Market Facilitation Index indicator was developed by Dr. Bill Williams, a well-known trader and author. He introduced this indicator in his book “Trading Chaos.” Dr. Williams designed the MFI to help traders better understand market dynamics. Since its introduction, the MFI has become a popular choice among traders to measure market intensity and make informed trading decisions. 

2. Working of Market Facilitation Index Explained

The MFI is designed to provide insights into the market’s dynamics and is based on for key elements: price, volume, and two types of bars (up and down). It has four bars: green bar, red bar, blue bar and pink bar. 

• Green bar indicates an easy and strong upward movement.
• Red bar signifies an easy and strong downward movement.
• Blue bar shows a market in consolidation.
• Pink bar suggests deceptive or misleading market conditions.

3. Calculating Market Facilitation Index: All You Should Know

Calculating the Market Facilitation Index is simple. Let’s start with the formula:

MFI = (High – Low) / Volume

• High (H): is the highest price of a trade during a specific time period.
• Low (L): is the lowest price of a trade during the same time period.
• Volume (V): represents the total number of cryptos traded during the chosen time period.

To calculate the MFI, subtract the low price from the high price, and then divide this result by the volume.

3.1. Colour-Coding Market Facilitation Index: How Does It Works

Here is a simple explanation on how you can colour-code the bars using MFI.

• Green Bar (Bullish Bar)

If the MFI value for a particular time period is high and the price is increasing, you can colour the bar green to represent a bullish market condition.

• Red Bar (Bearish Bar)

If the MFI value of a specific time period is high and the price is decreasing, you can colour the bar red to represent a bearish market condition.

• Blue Bar (Squaring UP Bar)

A blue bar is used when the MFI is low despite a price increase or decrease.

• Pink Bar (Fake BreakOut Bar)

A pink bar is used when the MFI is low and the price makes a significant move.

4. Launching Market Facilitation Index on a TradingView Chart: Steps

Here are the steps to launch MFI on a TradingView chart 

• Log in to your TradingView account
• Choose the trading pair or asset you want to analyse
• Click on the ‘Indicators’ button at the top of the chart
• In the search bar, type ‘Market Facilitation Index’ or simply ‘MFI’
• Click on ‘Market Facilitation Index’ when it appears in the dropdown and then click ‘Add to Chart’
• Adjust the settings for the MFI indicator if needed, such as changing colours, periods, or other parameters
• Click ‘OK’
• Start analysis

5. How to Read Market Facilitation Index

Reading Market Facilitation Index is very simple. In the process of reading, the four bars that appear on the indicator play the prime role.

• Green Bar (Bullish Bar)

This suggests that there is strong buying interest and price is moving up with significant trading volume, which is a positive signal for traders. 

• Red Bar (Bearish Bar)

This implies there is strong selling interest, and price is declining with significant trading volume, which is a negative signal for traders.

• Blue Bar (Squaring UP Bar)

This suggests that there is little trading interest in the market, and price movements are not being facilitated, which can indicate indecision or lack of conviction among traders.

• Pink Bar (Fake BreakOut Bar)

This can signal a fake breakout, where the price move is not supported by strong trading volume, indicating that it might not be a sustainable trend. 

Endnote

The Market Facilitation Index is a valuable tool for crypto traders, developed by Dr. Bill Williams, It measures market intensity by analysing price movements and trading volumes, simplifying interpretation through colour-coded bars. Green and red bars represent strong bullish and bearish trends, while blue signifies consolidation and pink may indicate potential fake breakouts. Adding MFI on a TradingView chart is simple, making it a useful aid for traders in understanding market sentiment and making informed decisions in the crypto world.