Market facilitation index
The Market Facilitation Index is a technical indicator developed by Bill Williams that relates the stock market volume and the change in the prices of a financial asset.
In much simpler words, the market facilitation index is an indicator of stock volume. The difference is that the traditional stock volume does not take into account the variations in prices, it only takes into account the number of shares or contracts that are traded in a market. The market facilitation index goes further. That is, it takes into account price variations and, at the same time, the volume traded.
Its appearance is as follows:
As we can see in the above chart of Japanese candles, the indicator is similar to the stock volume. In addition, it is changing colors. The bar can be pink, blue, green or brown. These colors are indicative colors and offered by default in the Metatrader trading platform. Next we will see how it is calculated, what each color means and how we can trade with this indicator.
How is the market facilitation index calculated?
Calculating the market facilitation index is frankly simple. We can calculate it manually without major problem. However, trading platforms, such as the one mentioned above, show their calculation automatically. In this sense, knowing how it is calculated will help us to interpret it later.
IFM = (High of the period - Low of the period) / Volume traded in the period
That said, we understand the following variables as:
- Maximum: It is the highest value reached by the price during a certain period.
- Minimum: It is the lowest value reached by the price during a certain period.
- Volume traded: It is the stock volume traded during a certain period.
- Period: The period to which we refer can be 1 minute, 5 minutes, 1 hour, 1 day, 1 month, etc.
For example, suppose a trading session on a certain asset. Let's assume that this asset is the price of financial futures on gold. The maximum marked that day is $ 1,100 and the minimum value is $ 1,050. The number of contracts negotiated amounts to 250,000 contracts. The period studied is one day. Thus, the market facilitation index would be:
IFM = (1,100 - 1050) / 250,000 = 50 / 250,000 = 0.0002
This value, depending on the asset, is usually multiplied by 1,000 or 10,000 to obtain a value that is easier to see. Although it is true, everything is said, that the important thing about this indicator, as we will see now, is not the absolute values.
Before moving on to the next point, let's see why the indicator bars appear in one color or another:
- Green: The IFM increases and the volume increases.
- Brown: The IFM falls and the volume increases.
- Blue: The IFM increases and the volume falls.
- Rosa: The IFM falls and the volume falls.
Trading with the market facilitation index
A priori this indicator is not used alone. Its creator, Bill Williams, considers it to be a very important indicator, but uses it integrated into his trading system. In any case, it is vitally important to know that the important thing is not the absolute values of the indicator. The important thing is the colors it adopts.
Knowing this, let's see how it is interpreted and what trading signals it can offer. We will do it based on the color that the indicator takes.
- Green: IFM and volume increase at the same time. That is, the asset is clearly moving in one direction (bullish or bearish) and the volume is increasing. It is a good time to add long positions (if the stock trend is bullish) or short (if the stock trend is bearish). For instance:
- Brown: The IFM falls and the volume increases. Which means that the asset does not have significant movements. There is a fight between buyers and sellers. It is not advisable to take any position.
- Blue: The IFM increases and the volume falls. The market is clearly moving in one direction, but no new investors are joining (volume drop). It is not advisable to take positions.
- Rosa: The IFM and the volume drop at the same time. When this color appears it is a sign that the trend may be about to end. It is advisable to close positions and get out of the market.
As we have seen in the examples of each of the bars, the signals are unreliable. Many times they indicate something that is not actually happening. That is why Bill Williams used it as an indicator of help or confirmation. By itself it does not give trading signals.