Bar (candlestick); Closing price to determine the direction of the candlestick; Volume; Relative changes in trading volumes and spread for the previous period. Bill Williams has reflected all of the above points in one concise formula, the "market simplification index" BW MFI:
The results of the calculations were displayed on the chart as a four-color histogram, depending on the change in the numerator and denominator indicators compared to their previous values, to account for the fourth postulate of the VSA:
- The bar graph is colored green when the numerator (High low) and denominator (Volumes) increase simultaneously;
- Brown occurs when the numerator and denominator decrease simultaneously; A rising trading range on falling volume yields blue;
- Pink neutral occurs when the numerator falls when volumes in the denominator rise sharply.
The formula covers only three of the four rules described above. The closing price of the candle and the trend direction are determined by the trader himself by analyzing the chart.
The Volumes parameter in the trading terminals is denoted in physical terms: the number of shares or derivative contracts (futures, options). To get the real volume of currency on the Forex market is possible only on ECN accounts, in other cases Metatrader gives the number of ticks of Buy/Sell deals. Indicator description
Market Facilitation Index, like many volume indicators, is used in trading systems only as a signal filter for deals. The main colors of the indicator are green histograms, which confirm the trend in the direction of the closing price of the candle. If it is lower than the opening, the trader should expect: Further fall of the currency pair; Breakdown of the nearest support level; The beginning of a new trend. To apply the last point correctly, it is important to understand that the histogram is tied to a single candle. The picture below shows a falling trend (1), but the growing candle (2) which corresponds to the green BW MFI histogram, was the beginning of a long-term upward movement of the EURUSD. This fact has not cancelled a similar trend-enhancing signal on the correction at (3). Several growing green bars in a row confirmed the strength of the positive trend (4 and 5).
The second most important signal BW MFI blue bar, indicating a divergence trend direction, not confirmed by trading volumes. The market makers or the inertia of the crowd continue to move, not supported by the big players. This means that at any moment a strong speculative pullback may occur in the market, which the current Buyers or Sellers will not be able to withstand due to low trading liquidity. The divergence extends to the current candle: if it is falling, as in the figure below in the case of (1), we should expect a bounce up. Sometimes the trading volume declines for objective fundamental reasons, but that does not mean a decrease in demand for the currency. In case (2) a strong downward trend coincided with the summer period, when the number of trades and players in the market is traditionally reduced.
Pink and brown colors also predict a fading or possible trend reversal. Bill Williams highlighted the "squat bar" with a falling trading range on rising trading volumes. It corresponded to the pink bar as the most probable precursor of a reversal. The brown color coincided with a "fading bar", often referred to in candlestick analysis as a "burnout", whose trading volumes were extremely low. The size of histogram bars is very sensitive to the volatility of the trading range in the numerator, i.e. the growth of the indicator values indicates an increase in the trading range. The decrease of the BW MFI histograms means that the volumes have increased on the market, but the range has returned to the "normal" weighted average values.
Modern market theory defines the border of volatility mode change as a trigger indicating a possible need to optimize the trading system settings. A trader should pay close attention to the statment in order to control the amount of losing trades, if the BW MFI has moved to a significantly new average level.
Description of settings
The Market Facilitation Index indicator can be found in the Metatrader trading platform through the Navigator or the "Insert" menu, the "Indicators" option in the "Bill Williams" section.
The histogram has no numerical settings, only color scheme. In the "Levels" tab, the trader can display the lines' values that are convenient for him. Conclusion
The BW MFI indicator breaks down the market fluctuations into four components conveniently displayed in different colors. The tool does not require setting, it automatically adapts to the timeframe. Both factors allow novice traders to use the indicator easily. With all the advantages of the tool, it is worth bearing in mind that it is only a filter of signals within the examined candle. In the first place should always be the BW MFI trading system entry conditions "last resort", confirming or rejecting trades.