The proposed Market Facilitation Index (MFI) shows the dynamics of price changes in the minimum base period – one tick. There are no real trading volumes on Forex – you have to be content with the tick indicator, that is, the number of transactions per tick. The change in market volume begins before the new trend becomes clearly visible on the chart. Therefore, the dynamics of the tick volume always outstrips the price reaction, which can move in the same direction even if the trading interest of the players decreases. The Market Relief Index shows how the market was doing during the current tick and how real players react to changes in volume.
MFI calculation method, setting and parameters
To calculate the indicator value for the current bar, subtract the min price from the max price and divide the result by the tick volume. Something like this: MFI = (PRICE (HIGH) – PRICE (LOW)) / VOLUME. In addition to visual settings, there is only one parameter – the number of periods for calculation.
For the analysis, only the dynamics of changes in the MFI indicator is taken into account, and not the absolute value – it is important to assess the price fluctuation. If the indicator grows, then this means not just an increase in volume (more and more players are entering the market), but also the fact that most transactions are opened in the direction of the current trend. It resembles the popular RSI in its application method.
MFI indicator: detailed description and application
Due to its special “sensitivity” to volumes, MFI manages to catch a decrease in activity before a trend reversal: those who wanted to trade in the current direction are already in the market and are preparing to take profits (at least partially), and those who are not satisfied with this direction are fixing losses exit the market and, more often than not, are in no hurry to open new deals.
MFI indicator trading signals: a detailed description of the behavior of the indicator line in overbought / oversold zones and divergence situations.
Critical zones are traditionally defined as 80/20 or 70/30 for more volatile assets. The very fact of reaching these levels already warns that the market may soon reverse, but this is not yet a signal to enter. In a strong and active (in terms of tick volume) market, the line can hang in critical zones for a long time.
In practice, before a trend change, the indicator line does not always go beyond the critical levels, so the upcoming reversal can be seen by changing the direction of the indicator in the middle zone.
As with any oscillator, a reversal of the MFI indicator line, especially from overbought / oversold zones, is a leading signal of a market direction change. This property is most beneficial for the periods from H1, because on smaller timeframes, the line will display the usual price noise.
In practice, divergence between the MFI indicator line and the price direction occurs extremely rarely, but is always effectively worked out. Only divergences on timeframes from H1 and higher are of trading value, as a rule, the indicator issues a warning signal 3-5 bars before the real reversal.
The MFI indicator is considered the most resistant to market noise and is actively used to measure the strength of cash flows that are invested in a particular asset (fill the market) or withdrawn from an asset (facilitate the market). The growth of the indicator line shows the growth of players’ interest in purchases, the decrease in the line – in sales.
For all its simplicity and clarity, the market facilitation index does not generate trade entry signals, but only provides information for analysis. A line reversal does not at all mean the emergence of a really strong, and most importantly, a volatile market, the indicator simply shows a change in trading preferences, and how profitable this reversal will be will have to be assessed using additional instruments.