Looking at a chart of TBF and in particular at accum/distribution vs MFI, these two indicators are seemingly going in opposite directions - how can this be? It seems to me they both are measuring similar things. Obviously this is not the case - please help me understand the differences.
asked Aug 04 '13 at 17:07
Here's what I get out of reading the chart school articles on these indicators:
Although both deal with price and volume, their calculations are quite different. The superficial difference is that MFI is an oscillator - meaning it has bounded values - can't go below zero or above 100, whereas Acc/Dist is an unbounded running total - no limits on its possible values.
But the difference that makes a difference is that Acc/Dist can generate a negative number when the close is up, if the close is in the lower portion of the day's range, or a positive number if the close is down but the close is in the upper portion of the range. MFI can't do that. If the average price is higher or lower, it will generate a commensurate value.
(A side note: neither one uses true range - substituting the close for the low on a gap up day, or the close for the high on a gap down day.)
So, if a stock is making lots of closes away from the average price, against the direction of the trend - meaning below the average price on an up day or above the average price on a down day, these two indicators will diverge.