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Stocks & Commodities V. 12:6 (253-254): The Market Facilitation Index by Gary Hoover

The Market Facilitation Index

by Gary Hoover

Here's how trader Gary Hoover, a first-time S TOCKS & C OMMODITIES contributor, uses the MarketFacilitation Index for day trading.

A pplying technical analysis to developing trading signals begins with the investigation of pricemovement and often incorporates volume studies to improve trading accuracy. The Market FacilitationIndex (M FI) is one indicator that synthesizes both price and volume analysis. The M FI is the ratio of thecurrent bar's range (high-low) to the bar's volume.

MFI =range

volume

The M FI is designed to gauge the efficiency of price movement. The efficiency is measured by comparingthe current bar's M FI value to the previous bar's M FI value. If the M FI increased, then the market isfacilitating trade and is more efficient, implying that the market is trending. If the M FI decreased, then themarket is becoming less efficient, which may indicate a trading range is developing that may be a trendreversal. Then, the indicator is used by comparing both the volume and the M FI of the current bar to theprevious bar. The current bar would be labeled thus:

Volume up and M FI up = +,+

Volume down and M FI down = -,-

Volume down and M FI up = -,+

Article Text 1Copyright (c) Technical Analysis Inc.


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Volume up and M FI down = +,-

The +,+ bar indicates a trend is developing: The volume is expanding and so is the price range. The +,+bar is an excellent way to confirm your trades. If you're in the trade and +,+ bars continue to show up,stay in your position and manage your stops. If you're on the wrong side of this type of bar, get out. The

+,- bar, however, indicates a market that is encountering resistance to the trend. Volume is expanding butthe range is narrowing. I have found the +,- bar to be of great value in deciding to enter or exit a trade.The other two bars (-,- and -,+) have not proved to be of any trading value for me, as they basicallyindicate the price movement is done by small traders or locals.

No single indicator can predict market action consistently, so I use the on-balance volume indicator alongwith information generated by the M FI. I only use the M FI to determine the correct time and price to enter,add to or remove a position at predetermined price levels. In my own trading in Treasury bond futures, Iwill calculate the next day's potential price range values using the pivot method. The pivot method usesthe following statistics from the previous day to estimate support and resistance levels for today.

P = Pivot = (H+L+C)/3

H = High, L = Low, C = Close

R = Range = (High -Low)

1st support = (2P) - H 1st resistance = (2P) - L2nd support = P - R 2nd resistance = P + R3rd support = 1st support - R 3rd resistance = 1st res + RDuring the day as the price approaches these numbers, I will look for divergence in the intradayon-balance volume indicator. If a divergence exists and I am at my calculated range number, I wait for a+,- bar to form. When this has been completed, my order is placed 2 ticks above or below the bar prior tothe +,- bar. If it is filled, a stop-loss order is placed. If the market breaks through the range number, no

orders are placed.Figure 1 is an example of this type of opportunity. The chart is a five-minute chart of the June Treasurybond futures on March 18, 1994. During the first three hours of trading, the market declined with theon-balance volume line confirming the downtrend. Then the market staged an advance up to and throughthe pivot point at 109-04. During the advance, the on-balance volume line diverged with the uptrend;then a narrow range appeared with an increase in volume. This is a +,- bar. The market rallied only a tickhigher and then resumed the previous downtrend. The combination of a +,- bar and the on-balancevolume line diverging indicated a possible reversal at the pivot point line. The close for the day was108-22.

In the past I have found it almost impossible to be profitable on a single contract, so I have adopted thepractice of using multiple contracts. When the position is put on, a limit order is placed to remove part ofthe position and put the money in the bank. As the trade progresses, I will remove more of the positionuntil I am finally left with one contract. For example, put on four contracts, cover two at a 10-tick profit,cover one at a 15-tick profit, let one ride and move your stop to break even. I have to use this approach toovercome my habit of looking for a home run. So now I let the market take me out on both loss andprofit, and this helps remove my emotions from the situation. Remember that getting in the trade is nevera problem; it's where you get out that counts.



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Gary Hoover is a private trader living in Crystal Lake, IL.

For products used in this article, see the Editorial Resource Index in this issue. Ensign 5 (EnsignSoftware)

FIGURE 1: FIVE-MINUTE CHART, JUNE T-BOND FUTURES. The solid line is the on-balance volumeline. Look for divergence between the OBV line and the market, and a +,- bar at a pivot point.

Figures 3Copyright (c) Technical Analysis Inc.


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Stocks & Commodities V. 7:10 (365-368): Market Facilitation Index Charles F. Wright

Market Facilitation Index Charles F. Wright

The Market Facilitation Index (MFI) is an objective means of measuring facilitation of trade which, inits simplest terms, means how well the market is working efficiently. An efficient market is very liquidand both short- and long-term investors are actively trading, from the locals in the pit to commercials andspeculative traders.

A market that is not facilitating trade is generally a one timeframe market, dominated by short-termoriented locals. Volume is low and there is very little activity from the longer term traders and investors.The locals simply run the price up and down, looking for stops and waiting for the external paper to enterthe market.

The MFI formula divides the range of the current price chart bar by the volume of the same bar. MFI maybe used for all time periods from five minutes up to daily and weekly charts. It is acceptable to use eithertotal tick volume or actual volume on daily and weekly charts and, of course, tick volume on intradaycharts. The only requirement is consistency on the daily and weekly chartsdo not switch back and forth.

A typical MFI calculation on an S&P 500 30-minute bar chart is:

MFI = Range (268.25- 267.20)Tick volume (193 Ticks)= =105193 0544.

The MFI of 0.544 actually measures the points traveled per tick and is an extremely accurate depiction ofthe efficiency of the market during this particular bar. If the current MFI is greater than the previous MFI,there is more price movement per tick, greater facilitation of trade and a positive MFI.

Signal library



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The MFI signal library is based on four relationships between the MFl and volume:

The ++ relationship is the strongest indication the market is facilitating trade. All players are in themarket, long- and short-term, and liquidity is substantial. From the standpoint of the pit, there is muchoutside paper coming in and the locals are also extremely active. With higher volume and a +MFI, youwould want to go with the breakout of this bar or use it as an entry signal in the direction of your trendindicators.

Trading very short-term charts, I would statistically search for anoptimized system that was profitable over recent history.

A -+ combination indicates facilitation is less robust. Usually, it is a half-hearted move on low volume.Sometimes it is the precursor to a large move that needs to build some volume before it takes off. Unlessa -+ is followed shortly by a ++, this market action is best interpreted as a fakeout orchestrated by thelocals in the pit. The -+ is their trademark for running the price all over the place and going for stops.

A -- occurs when the market is taking a rest to catch its breath. In the pit all is quiet. The locals have towait for outside paper or until they can sense that a move will be imminent during the sleepy -MFI bar.

A +- usually marks the end of a trend or move. If not the end of a move, it marks the price platform fromwhich prices will leap in continuation of the trend. In either instance, a +- signals that an important pricechange is imminent.

If you are trading intraday charts, a visual shorthand for a +-would be smaller range with higher volumecompared to the previous bar. This signal has most promise when buying support and selling resistance.

Sample performanceI have been a member of the Chicago Mercantile Exchange (CME) and day trading the S&P 500 since1985. Trading very short-term charts, I would statistically search for an optimized system that wasprofitable over recent history. I would then trade it until the market changed and the system stoppedbeing profitable. I'd search again to find the next technique that would work in this new market.

In mid- l987, I concluded this was just too much work. First, changing optimized methods every three to

four weeks was psychologically difficult and optimizing by hand was just too time consuming. In 1988 Isolved both problems when I developed the MFI and computerized it.

The MFI grew out of my frustration in not being able to successfully trade market logic with the ChicagoBoard of Trade's Market Profile. MFI is my attempt to "mechanize" market logic principles.

The beauty of this technique is that, used in its pure form, it is not optimized. It responds and adjusts tocurrent market volatility as I generally compare the current bar's MFI to the previous bar's MFI. I customprogrammed my indicators on System Writer Plus and simulated their effectiveness over a statistically



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overbought-oversold indicator in conjunction with various combinations of signals and exploring othertimeframes and other futures contracts provides virtually limitless avenues for research using MFI.

For me, the most exciting part of the MFI is that it and its signals make market sense. They reflect what ishappening in the market now, in the preset tense. This is truly market logic.

Charles Wright is a member of the Chicago Mercantile Exchange and teaches trading as a businessseminars. He is editor of the System Trading and Development Newsletter, and chairman and CEO ofThe Fall River Group Inc., 11740 N. Port Washington Road, P.O. Box 40, Mequon, Wl 53092, (414)241-8020.

Market Profile is a registered trademark of the Chicago Board of Trade.

FIGURE 1:



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Stocks & Commodities V. 8:11 (413-416): The Market Facilitation Index Update: 1/89 to 3/90 by Charles F. Wright

The Market Facilitation Index Update: 1/89 to3/90

by Charles F. Wright

I have noticed through the years that when a technique is disclosed in the popular press you can counton it to stop working for some time after the disclosure. You can speculate as to why, but the most logicalreason is that many individuals are testing it or trading it. With so many people looking at the system, it isnot surprising that it does not work.

This may be the market's way of weeding out the inexperienced and the part-timers. Most novice traderstest a new technique in the immediate period after its disclosure. If it is not instantly profitable they willabandon it in the face of sound historical data and begin anew their search for the best system.

The Market Facilitation Index (MFI) was no exception to this phenomenon.

The MFI is calculated by dividing the range of an intraday bar (in this case a Standard & Poor's

30-minute bar) by its tick volume. The result is the number of points that the S&P moved for each tickduring the bar. For instance, if the range of the bar is 200 points and the tick volume is 100 for the samebar, then the MFI = 0.500. This means that for every tick during this bar the S&P moved 0.5 points.

This number is then compared with the previous MFI. If it is greater than the previous bar's MFI then Ibelieve that the market is facilitating trade, and I call it a +MFI. If the MFI is less, then the efficiency ofeach tick decreased and the market is not facilitating trade in relation to the previous bar, and thus it is a-MFI.



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My research to date has shown that the most powerful signal from the MFI is given when it is combinedwith volume. If the current bar is both a +MFI and has greater tick volume than the previous bar, it issignificant and worth trading. I call this a ++ (plus MFI and plus volume).

One of the main reasons I am enthusiastic about the MFI is that it is an indicator that is not optimized.There is no real way, in its pure form, to curve-fit the MFI unless you combine it with other optimizableindicators. By comparing bars, you can compare relative values of the MFI rather than rely on an absolutenumber. This causes MFI signals to adjust to all market conditions and different degrees of volatility.

In my October 1989 S TOCKS & COMMODITIES article, I looked at trading all the ++ bars with a breakout ,assuming that the ++ was telling us that the market was facilitating trade and a breakout of this bar wouldbe significant.

Next, I showed how you could trade a breakout of each of the individual intraday S&P 30-minute barsand exit on the close of the day. I listed the profitability for each unique half-hour breakout. Theconclusion was that the 1:30 and 2:00 Central Standard Time (CST) bars were the best to trade.

In October 1989 I looked at trading all the ++ bars with a breakout,assuming the ++ meant the market was facilitating trade.

I devised an entry technique that straddles the bar if I'm initiating a position (buy one tick over the highand sell one tick below the low) or reverses a position by buying or selling two contracts at the samepoints if we already have a position. The key to this entry technique is that if the pending orders are notfilled during the subsequent bar, the orders are canceled. Nothing important has occurred (that is, nobreakout). Think about it. It is an important concept when trading the MFI.

Using System Writer Plus, I have updated the original data that ended in December 1988. I have includedall 1989 data and most of first-quarter 1990's. Let's see how the profitability of the MFl has fared sincethe October 1989 article. The results are in Figure 1 .The % ROMID that you see in Figure 1 is the percentage return on intraday drawdown. I use this insteadof return on account (ROA), as it eliminates margin from the calculation. The rationale for this isthreefold.

First, since it is now standard practice to keep margin in Treasury bills, it's redundant to use the margin inthe calculation for the ROA. We should either eliminate the margin or include the interest earned on theT-bills to calculate the return on account. I eliminate the margin.

Second, margin requirements change frequently, forcing us to estimate the average margin over a periodof years. In the case of the S&P, for instance, this would be difficult, given the wide swings in margin

over the past few years.Third, using ROMID facilitates the comparison of different systems as well as the same systems ondifferent commodities. Comparing return on intraday drawdown eliminates differences in marginconcentrating on the return for funds at risk.

In Figure 1 we see that the MFI has remained profitable for 1989 and first-quarter 1990, more so for the1:30 and 2:00 breakouts that exit on the close of the day than trading all the ++ signals and holding aposition overnight. These data and the rest of the tests included $25 for commissions and nothing for



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slippage. The afternoon appears to remain the most profitable time to trade the S&P.

A quarter-by-quarter breakdown of the profitability for trading all the ++ signals with the system is inFigure 2 . This system had its worst two quarters (out of 17) of profitability since 1986 in the quartersending March 1989 and June 1989. The ++ signal returned to profitability in third-quarter 1989 and hasremained profitable since then.

If the MFI is greater than the previous MFI, check the tick volumeto see if it is greater than the previous bar's tick volume. If it isnot, then do not trade.

The 1:30 and 2:00 breakouts remained profitable. The system had a small $900 drawdown in first-quarter1989 and continued with approximately the same statistical profile as in 1986-88. (See Figure 3 .)

Perhaps the most interesting phenomenon is if the 1:30 bar were eliminated and only the 2:00 breakouttraded, the performance would improve significantly. While the net profit remained about the same, theprofit per trade almost doubled from $143 to $253. A ROMID of 673% in 15 months of trading averagesout to a 45% return per month. This degree of return requires that this MFI technique be looked atseriously, in particular the 2:00 breakout. The results for the 2:00 breakout are in Figure 4 .

I thought the results for the 2:00 were particularly promising, so I went back and looked at the 2:00 ++breakout for the whole test period from first-quarter 1986 through first-quarter 1990. The results inFigure 5 show only two losing quarters, those ending March 1987 and March 1989, both with losses lessthan $1,000. The consistency of these results should demonstrate the effectiveness of combining the MFIand tick volume. It should also dispel any concerns of overoptimization and curve-fitting, as thistechnique has performed consistently through many different types of markets.

For the full-time period, 1986 through early March 1990, the 2:00 ++ breakout had a ROMID of 1,963%,almost 500% per year, or 52% per month ( Figure 6 ). This included $25 for commission and no slippage.An average $242 per trade gives the system ample room for one or two ticks of slippage and still retainits profitability.

Here's how to trade the 2:00 breakouts. First, try to get to the office by 1:45 p.m. Chicago time. Calculatethe MFI for the 1:00 to 1:30 bar and note the tick volume. At 2:00 calculate the MFI for the 1:30 to 2:00bar. If the MFI is less than the previous MFI you can go home. If the MFI is greater than the previousMFI, check the tick volume to see if it is greater than the previous bar's tick volume. If it is not, then donot trade.

If both the MFI and the tick volume are greater than the previous bar, then you have to stay and work.

First, put in two orders, one to buy one tick over the high of the 2:00 bar and the other one tick below thelow. You then must wait until 2:30 to see whether you are filled. If you are not filled by 2:30 (an insidebar), you cancel both your orders.

If by chance you do get long or short in the 2:00 to 2:30 time period you immediately cancel the unfilledorder and put in a $ 1,500 money management stop. You then wait until 3:15 and exit the market on theclose. If you don't want to wait around to watch the action you could place an OCO (one cancels theother) order and go out for lunch.



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That's it. I don't know of too many jobs that can give you a return of more than 50% a month onmaximum drawdown while requiring you to work between 15 and 45 minutes a day. Take a look at theMFI. It's worth your while.

Charles Wright is a member of the Chicago Mercantile Exchange and teaches the Trading as a Businessseminar. He is editor of the System Trading and Development newsletter.

ReferencesApplications of the Market Profile. Published by Commodity Information Services (CISCO), Chicago.Drinka, Thomas P., and Robert L. McNutt [1987]. "Market Profile and market logic," in Technical

Analysis of Stocks & Commodities : Volume 5.Drinka, Thomas P., et al. [1988]. Market Profile series in Technical Analysis of Stocks & Commodities :

Volume 6.Jones, Donald L. [1988]. "The trade facilitation factor," in Technical Analysis of Stocks & Commodities :

Volume 6.Market Logic. Institute for Econometric Research, 3471 N. Federal Highway, Ft. Lauderdale, FL 33306.System Trading and Development newsletter, International Society of Technical Traders,9737 NW 41st

St., Ste 229, Miami, FL 33178.System Writer Plus. Omega Research, Inc., 3900 NW 79th Ave., Ste 520, Miami, FL 33166.Wright, Charles F. [1989]. "Market facilitation index," Technical Analysis of Stocks & Commodities :

Volume 7, October.



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FIGURE 1 : Since October 1989, the MFI has remained profitable, more so for the 1:30 and 2:00breakouts that exit on the close of the day than trading all the ++ signals and holding a positionovernight. The afternoon appears to remain the most profitable time to trade the S&P.* ROMID = Return on intraday drawdown

FIGURE 2 : A quarter-by-quarter breakdown of the profitability for trading all the ++ signals with the MFlsystem shows it had its worst two quarters (out of 17) of profitability since 1986 in the quarter sendingMarch 1989 and June 1989. The ++ signal returned to profitability in third-quarter 1989 and hasremained profitable since then.



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FIGURE 3 : The 1:30 and 2:00 breakouts remained profitable.

FIGURE 4 : If only the 2:00 breakout is traded, performance improves significantly. While the net profitis not increased, the profit per trade doubles.



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FIGURE 5 : Looking at the 2:00 ++ breakout from first-quarter 1986 through first quarter 1990, therewere only two losing quarters, those ending March 1987 and March 1989.

FIGURE 6 : From 1986 through early March 1990, the 2:00 ++ breakout had a ROMID of 1,963%,almost 500% per year, or 52% per month.



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FIGURE 7 : Courtesy CRB Commodity Year Book.



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MFI INDICATORSTradeStation and SuperCharts users can use the following formulas in the PaintBar Study tocolor bars for each of the MFI indicators. Simply type the formula in the IF box of the PaintBarformula dialog box and choose your color for the bar to be painted.

For the squat indicator, type in:

((High-Low)/Volume)volume[1]

For the green indicator, type in:

((High-Low)/Volume)>((High[1]-low[1])/volume[1]) and volume>volume[1]

For the fade indicator, type in:

((High-Low)/Volume)


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For the fade indicator, type in:

B.MFI(@)

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