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THE MARKET FACILITATION INDEX
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Whenever the tick volume goes up, we know we have more out­side paper coming in; whenever it goes down, we know that less outside paper is coming to the floor. Our next task is to assess accurately the effect this change in volume has on the market. It is not enough to know how much; it is more important to know how the market reacts to this change in volume. Heavier volume does not always mean the market will move. The market's main task is to find a balance point, and it will do it in a fraction of a second. That balance point will only move when there is a bias of incoming orders, so we need a bias finder.

This bias finder works in both trending and bracketed (range-bound) markets. It is relatively easy to make profits in a trend. The problem is keeping those profits when there is not a trend. Many experienced traders will tell you that it is easy to make money trading but hard to keep it. The profits made in a trend are swept back during bracketed markets. We worked on this task for over five years before developing a simple and accurate measure to make trading more profitable. In 1983, when we started developing this indicator, we felt that when the markets were in a bracket, trading was like slogging through mud; when they were trending, it was as if they were running on concrete. So, we first referred to this indicator as the mud factor: the more mud, the slower the market would move. About 1986, we started calling it tic mileage because we were measuring the mileage in terms of price change per tick. In 1989, we became more sophisticated and started calling it the Market Facilitation Index (MFI). This index is now used worldwide and comes as a standard indicator on several technical analysis systems.

The MFI is very simple. Determine the range of whatever time period you are observing by subtracting the low from the high. Then divide that number by the volume. Expressed as a formula:

MFI = Range (High - Low) Volume

Breaking this formula down, you can see that it is measuring the change in price per tick:

Range __ A Price Volume Tick

Comparing this to Einstein's formula E = me 2 , we can solve for the constant c 2 by transposing the m (mass):

In trading, the mass would correspond to volume, and the energy would correspond to the price movement. Would Ein­stein agree? I have no idea, but it's fun to speculate, in trading and thinking.

We are measuring the effective change in price per tick. This number has no absolute value. Its value lies in comparing this number with a previous MFI. For example, if the current bar's MFI = .541, that is not comparable in any way with a bar from yesterday's chart that might have a value of .541. We are interested in the MFI in relation to the immediate previous market action. We want to know whether there is more or less market facilitation of price movement. The MFI is a measure of the market's willingness to move the price. I cannot overemphasize the value of this indicator. It is a more truthful measure of market action than any stochastic, RSI (Relative Strength Index) or other momentum indicator. Whatever you do, don't insult it by comparing it to someone's analysis or forecast. This is where the truth of the market is found.

The MFI's measurement of how many points the market traveled per tick is an extremely accurate description of the efficiency of the market during this particular bar. If the current MFI is greater than the previous MFI, we observe more price movement per tick and greater facilitation of price movement through time. Again, we are comparing only the current bar's MFI with the immediately preceding bar's MFI. This allows us to determine whether the present time period is providing more or fewer trading opportunities.

A tremendous advantage of the Prof itunity approach is that nothing is optimized. The MFI continually changes on a relative basis within the market's current volatility. Thus, as the market's personality changes over time, so will the MFI and its various relationships.

Let's sum up what we've learned at this first stage (novice level) of understanding the market and its opportunities. We know how to determine:

•  Who is moving the market (buyers or sellers);

•  Which direction the market is moving;

•  What kind of job the market is doing in facilitation price
movement through time (MFI).

All of these information items, by constantly interacting with each other, will reveal various market conditions and different trading opportunities.

Next, we can combine the above factors to increase the power of our understanding and our analysis of market action.

The MFI/Volume Combination

A change in volume alerts us before a trend begins, and the MFI reveals how the market is reacting to this increase/decrease in volume. By combining these two factors, we can get a more vivid and accurate picture of market action. We will use volume twice, but in different ways: (1) we use raw volume as revealed by tick volume, and (2) we use volume in computing the MFI. After using the MFI for a very short while, you will recognize visually whether the MFI is greater or less. Don't get bogged down thinking you have to use the calculator on every bar. You can also obtain several computer programs to color the bars, depending on changes in the MFI. Remember that we are uncomplicating the market action for easy, accurate, and quick decisions. In our tutorials, we have a goal that after four days of training you should be able to analyze a chart you have never seen before (one that contains roughly 140 bars; a day chart will cover over 6 months of action) and know what your position (long or short) should be on each bar, where your stops should.be, where you should pyramid, and where to take profits—and do all of this in 10 seconds or less. Over decades, I spent 5 to 9 hours per day analyzing the stock market. Now, using the exact procedure I describe in this chapter, I follow over 30 markets and need less than 20 minutes of analysis time per day for all the markets combined.

In the rest of this chapter, I introduce some helpful tools and show you how to use them effectively.

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