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Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

NOVICE TRADER

The Market Facilitation Index

Volume, one of the key elements in technical analysis, is used to analyze the power behind
a trend. Heavy volume days may indicate a strong trend, while light volume days could
indicate the lack of a trend. Here's a method to connect volume and price movement to
quantify price activity.
by Thom Hartle

n Trading Chaos, Bill Williams describes a unique way to combine price action and volume. The technique
offers a perspective of the current state of the market based on this relationship between price movement and
volume. For example, heavy volume may be signaling a trend, but not always, as increased activity without
price movement may be indicating a trend reversal. Williams's approach allows the trader to gain insight into
the intensity of the trading activity and create new skills of analysis. In addition, this method can be used in
any time frame from intraday bars to weekly bars.

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Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

THE MFI
Before going any further, let's define the MFI. The market facilitation index is the bar's range (high-low)
divided by the volume for the bar. Each bar now has a mathematical relationship of the price activity versus the
volume. In essence, the MFI is a measurement of market efficiency, tracking how much movement has
occurred in price relative to the volume. By itself, this ratio offers little insight, but Williams recommends
comparing the MFI for the current bar to the previous one. Once you do that, you can gauge the current bar's
efficiency or ability to facilitate price to the previous bar's degree of efficiency.
To understand what the market's ability to facilitate price indicates, however, a discussion about volume is in
order.
Today, trends in the futures market are primarily driven by orders coming from off the floor. The really large
volume days are often due to outside participants' reactions to fundamental factors confirming or altering the
attitudes of general players toward the market - for example, the Treasury bond futures market reaction to a
surprisingly large or small unemployment report.
Contrast this degree of activity to, say, a day in the T-bond market when there is little news and the trading
activity in the pit consists primarily of locals trading and off-floor traders trading for very short-term moves.
Consequently, on these days the volume is very low. Thus, we can say that trends are driven by orders
coming from off the floor. And before a trend can start, first there must be an increase in volume.
At this point, reintroducing the MFI and volume analysis is warranted. Consider this: If today's MFI is
compared with yesterday's, you can gauge today's price activity versus volume to yesterday's price activity
versus volume, and from this comparison form some interesting conclusions.
For example, if the difference between the high and low is wide today and the volume is high, while
yesterday, the difference between the high and low was narrow and the volume was low, you can assume that
the market was facilitating more price movement today than it was yesterday. The wide range and the increase
in volume was strong evidence that market participants were much more active today than yesterday.
But what if the volume was greater today than yesterday, yet the trading range was smaller? This situation, the
relative narrow trading range and increase in volume, calculates out to a smaller MFI today compared with
yesterday, but the increase in volume denotes more participation by traders. What could that indicate? What if
the trading range was wider (that is, a larger MFI) but the volume was lighter? Williams researched these
issues and developed four guidelines that he refers to as Profitunity windows , based on the comparison of the
current bar's MFI and volume to the preceding bar's MFI and volume. Each window represents a different
situation:
THE GREEN BAR
In the first situation, the current bar shows an increase in volume and MFI relative to the previous bar (intraday
traders may use the tick volume per bar for volume). Here, we have price movement, and the MFI is larger for
this bar than that for the previous bar. Further, more players are entering the market as signaled by the increase
in volume. This activity in the futures markets means that off-floor traders are very active. In addition, the
price action is directional - that is, the market is moving in one direction due to the involvement of new traders
putting on new positions. This is the kind of day that you would already want to have a trade on in the same
direction. Williams referred to this type of day situation as green because it represents a green light for the
market movement.
THE FADE BAR
The next situation is a decrease in volume and a decrease in the MFI. Here, the market has slowed, there is a
minor amount of activity as indicated by the low volume and there is a lower MFI. Williams called this day a
fade , as the traders' interest in the market by this point is fading. Often, this sort of day happens at the end of a
trend. The market has simply reached a point where no one is willing to establish any new positions. At this

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Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

point, the market appears to be suffering from a certain amount of boredom, but out of this market condition, a
new trend could emerge.
THE FAKE BAR
The third situation represents a decrease in volume but an increase in the MFI. This condition denotes that the
market is moving more relative to the previous bar (the greater MFI), but the lack of volume is evidence that
there is no new participation. The price action may be driven by just the traders in the pit and is not attracting
new players from the outside. Williams hypothesizes that the traders in the pit may be just strong enough to
push the market to price levels where there are many stop orders resting in the hands of the brokers, hence
faking out the off-floor traders.
THE SQUAT BAR
The last situation, and one that offers the most opportunity, according to Williams, is the squat day. Here, the
volume of today is greater than that of yesterday, but the MFI is lower. The increase in volume indicates heavy
activity, but the decrease in the MFI indicates that the market is unable to make any real headway. Volume
increases, the trend has stalled and the price movement has stopped. This price action usually, but not always,
occurs prior to an important move in the opposite direction. Williams calls this a squat bar because the market
appears to be squatting prior to a breakout. Often, the breakout of such a bar will indicate whether this squat is
a trend reversal squat or a trend continuation squat.
Figure 1 is a table outline of these indicators. (TradeStation and CQG for Windows users can use the sidebar
"MFI indicators" for their formulas.) Let's look at some actual situations of these four indicators using the
Treasury bond futures market.

FIGURE 1: The volume and MFI columns refers to an increase (+) or a decrease (-) in the current bar
relative to the previous bar in the appropriate indicator.

Figure 2 details numerous patterns. For example, bonds were in a trading range during February; at the upper
resistance levels, the daily bars formed squats (squat bars are red, green bars are green, fade bars are blue and
fake bars are gray). Each of the two high points of the trading range (point A) are squats. On February 5, the
market traded back down toward the lower side of the trading range and formed a fade bar (point B), indicating
that as prices fell, fewer and fewer traders were willing to chase the market down, a classic fade bar.

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Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

FIGURE 2: T-BONDS. Each bar is color-coded. Red stands for a squat bar, green for a green bar, blue for
a fade bar and gray for a fake bar.

On February 13, the market formed a squat and then a fade day followed, but the green bar (C) closed on the
lows, indicating an increase in selling. Next, the market formed a squat bar (D) as major support gave way.
The closing price was at the low end of the day's range. Clearly, a lot of new selling came into the market and
the squat represented a trend continuation bar. The next bar, point E, was a fake bar, but this was because the
previous bar's volume was very large and the bar's volume nearly matched the previous bar's volume.
However, the next bar was a fade (F), which again indicated that traders were losing interest in selling at these
levels.
But the following day was another fade day, an inside day, evidence that traders were not willing to push the
market higher. Then a green bar (point G) followed, providing continued evidence of a downtrend. A
short-term bottom occurred when two back-to-back squats (H) presented themselves. The short-term rally that
followed ended with a fade bar (I).
DIFFERENT PICTURE
This same analysis can be used in different time scales. For example, Figure 3 is a monthly chart. Note that the
months of December and January (point A) indicate an increase in volume and a narrow trading range. This is
a squat on the monthly bars and signals the conclusion of the uptrend. If we look inside the monthly bar using
daily bars (Figure 4), we see a great deal of price activity with no real headway, a classic situation of supply
distribution after an uptrend. All the volume represented new buyers being met by sellers, creating a trading
range that ultimately led to a market decline.

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Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

FIGURE 3: T-BONDS MONTHLY CHART. December and January formed two


squat bars, forewarning of a trend reversal.

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Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

FIGURE 4: DAILY BAR. During December, January and most of February, the bond
market was in a trading range that evolved into a reversal.

The same situation can be seen on an intraday basis. In Figure 5, an hourly bar chart of the pit trading (Globex
activity is excluded) for June T-bond futures shows a squat forming on the hourly bar on May 23 at 7:20 a.m.
(point A). The volume is greater, but the trading range is narrower. If we look at this 60-minute bar on a fiveminute basis (Figure 6), again, we see a great deal of activity with no real headway. The market reverses after
this trading range.

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Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

FIGURE 5: T-BONDS. An hourly bar chart of the pit trading only for June T-bond futures shows a squat
forming on the hourly bar on May 23 at 7:20 (point A). The volume is greater, but the trading range is
narrower.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V14:8 (348-352): The Market Facilitation Index by Thom Hartle

FIGURE 6: T-BONDS. If we look at the 60-minute squat bar from Figure 5 on a five-minute basis, we
see a great deal of activity with no real headway.

SUMMARY
In short, trading using technical analysis always leads to understanding volume relationships, one way or
another. Bill Williams's market facilitation index, when used in a comparative manner, gives the trader very
powerful insight into the current state of markets and offers exellent trading oopportunities as well.

Thom Hartle is Editor of STOCKS & COMMODITIES.


RELATED READING & RESOURCES
Williams, Bill [1995]. Trading Chaos, John Wiley & Sons.

Copyright (c) Technical Analysis Inc.