Biggles,
Here we go!
MFI
Basics - This is basically a Momentum Indicator which indicates the Money flowing in and money flowing out. Typical way to use this is to look for divergence between Money flowing in and price and by seeing when markets are reaching top and bottom (80 & 30 levels). Very similar to how you would use the RSI.
Calculation - There are basically three stages of calculation done to determine the MFI
a) First we calculate the Typical price which is equivalent to (High + Close + low)/3
b) Second we calculate the Money flow, which is equivalent to Typical Price*Volume. In this case if today's Typical price is greater than yesterdays typical price, then it is considered as Positive Money flow. Else vice versa.
c) We typically get two Variables in this. The positive money flow and the negative money flow. If we take the ratio of both, we then get the Money Ratio.
d) Finally we calculate the MFI which is equivalent to 100/(1+Money Ratio).
PVT
Basics - PVT essentially is a cumulative total of volume which mainly depends on the "%change" of the closing price. This is not a momentum indicator, but it is more like "price" which essentially has no limitations on the upside and downside. Though many consider it to be similar to OBV, mathematically they differ a lot. While OBV adds all volume of the day if price close up and subtracts all volume of day when prices close down, PVT only adds and subtracts portion of volume depending on the extend of movement.
Lets say volume yesterday was 100. Today prices closed up by 10% with volume of 20. Obv would add the volume of 20 to yesterday's volume of 100. SO total volume would be 120. Whereas PVT would add (0.01*20) 2 to yesterday's volume of 100. Basically it is weighing the magnitude of price move. This is precisely why PVT is more accurate and important.
Calculation - PVT is essentially calculated by multiplying day's volume with the price change and finally adding this to cumulative.
(%Change in Price*Volume) + Yesterday's PVT
PVT & MFI
a) MFI is more a momentum indicator and hence has its inherent draw backs like any other momentum indicator. That is, can remain in oversold and overbought regions for many days and hence cannot aid in proper analysis. PVT is more like a price indicator. Visual inspection and inference is more easier and accurate.
b) MFI also does not take into account the price weightage. This is a serious draw back. A day with 5% move with volumes is more significant than a day with 1% movement with volumes. PVT corrects this.
c) In terms of value addition, PVT adds far more value as it is easy to analyze and more meaningful when it comes to market analysis. It does not contain the calculation bias which usual momentum indicator do. That is, on slight change of volume, the reading on MFI can jump from 40-60 without any meaningful interpretation. Similar to the problem faced by RSI.
Hence overall, amongst all PVT stands out the most.
Tc
