The Market Facilitation Index (MFI), developed by Bill Williams, is a unique indicator that measures how efficiently the market moves price relative to volume. Unlike popular oscillators such as the RSI indicator, momentum indicator, or stochastic oscillator indicator, the MFI focuses on the relationship between price change and volume changes in real time. In this beginner-friendly guide, AZBroker explains how the Market Facilitation Index works, what its color codes mean, and how retail traders can combine it with price action trading and confluence tools for stronger trading decisions.
What Is the Market Facilitation Index (MFI)?
The MFI calculates how much price moves for each unit of volume.
Its formula is simple:
MFI = (High – Low) / Volume
This makes the indicator helpful for understanding market participation whether the market is being driven by big players or by weak, low-volume movement.
Because of its volume-based logic, the MFI aligns well with tools like the money flow index mfi indicator, on balance volume indicator, and chaikin money flow index, providing deeper context for price shifts.
Understanding the Four Color Codes of MFI
Bill Williams created a four-color system to make the MFI easier to interpret:
- Green (High Price Movement, High Volume)
This is the strongest signal.
Both price and volume increase, suggesting solid institutional activity.
This often confirms breakout strength, similar to MACD trading or momentum indicator trading signals.
- Fade (Low Price Movement, Low Volume)
The market is quiet, often before a big move.
Ranges or compression patterns like rectangle pattern trading or ascending triangle pattern commonly appear here.
- Fake (High Price Movement, Low Volume)
Price moves without volume behind it.
This is a warning sign and often leads to false breakout trading or quick reversals.
- Squat (Low Price Movement, High Volume)
This is a key reversal signal.
High volume enters the market but price refuses to move typical before a major shift.
This aligns with divergence trading strategy, where momentum and volume disagree with price direction.
How to Use the MFI in Real Trading
- Confirm Breakouts
Before entering a breakout, look for a Green MFI bar.
This shows strong participation and reduces the chance of entering a fake move.
Combine with:
A Squat signal shows heavy volume but no price movement.
This often appears at:
Support or resistance
End of trends
Before major reversals
Confirm with candlestick patterns like the Doji candlestick, engulfing pattern candlestick, or hammer candlestick.
- Avoid Fake Moves
A Fake bar means price is moving without real strength.
Avoid buying breakouts or chasing momentum during Fake signals.
Use confirmation from tools like:
Using multiple time frame analysis helps align your trade with the bigger picture:
This forms a strong confluence trading strategy.
Conclusion
The Market Facilitation Index is a powerful volume-based indicator that reveals the real strength behind price movement. When combined with price action, support/resistance, candlestick patterns, and momentum tools like the RSI indicator, MACD meaning, and momentum indicator, traders gain a clearer understanding of institutional participation and market phases. With guidance from AZ Broker, you can start applying the MFI effectively and build a disciplined, informed approach to trading any market.