V.14:8 (348-352): The Market Facilitation Index by Thom Hartle

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

In 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.

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 localsY´ 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.