A:

The disparity index is a technical momentum indicator that compares market price to a time-defined moving average of market prices. Traders and analysts that use the disparity index to look for signals of trend strength and the possibility of coming exhaustion. Others use it to spot overbought or oversold positions for a given security; they are overbought when the index returns a value greater than or equal to the upper bound level, and they are oversold when the value is lower than the lower bound level.

The disparity index relies on the relationship between a current trading price and its most recent closing price. Differences are expressed as a percentage, helping to avoid misinterpretation based on strange trading volumes or ranges. As with any momentum indicator, the disparity index is best used along with other tools when trying to confirm trendiness or possible reversals.

A security's price may rise or fall rapidly within short periods of time. The aim of the disparity index is to measure just what is considered too sharp of a rise or fall, providing clarity in a situation that might otherwise be seen as random. The disparity index assumes that prices are reactive to overzealous periods of buying or selling, even within a trend. Traders use the disparity index to look for a continuation pattern in the short term or complete trend reversals in the long term.

Countertraders and contrarians make heavy use of momentum indicators such as the disparity index. However, despite being a valuable short-term tool, the disparity index is not meant to be a stand-alone trading instrument.

RELATED FAQS
  1. What is the disparity index formula and how is it calculated?

    Discover how to calculate the disparity index, a technical indicator used by analysts to measure price movements in a candlestick ... Read Answer >>
  2. How do I use the disparity index in forex trading?

    Read about how traders in the forex market can use the disparity index to identify reversals, divergences and overbought/oversold ... Read Answer >>
  3. What are the best technical indicators to complement the Dynamic Momentum Index?

    Use other technical indicators to complement the use of the dynamic momentum index in analyzing a market and determining ... Read Answer >>
  4. What is a common strategy traders implement when using the Dynamic Momentum Index?

    Learn how to implement a common trading strategy using the dynamic momentum index that traders utilize when price is near ... Read Answer >>
  5. Why is the Dynamic Momentum Index important for traders and analysts?

    Obtain early indications of overbought or oversold conditions in a market by learning the significance of the dynamic momentum ... Read Answer >>
  6. How do I use the Dynamic Momentum Index for creating a forex trading strategy?

    Create a forex trading strategy designed to take advantage of the ability of the dynamic momentum index to give early signals ... Read Answer >>
Related Articles
  1. Financial Advisor

    Relative Strength Index (RSI)

    Learn more about this technical momentum indicator that determines whether an asset is overbought or oversold.
  2. Trading

    The Top Technical Indicators For Options Trading

    Options traders have to pay attention to more indicators than your average stock trader does, including volatility, direction, and duration.
  3. Trading

    Top 7 Technical Analysis Tools

    Technical indicators determine the direction of an asset’s momentum and whether that direction will continue. Here are seven used most.
  4. Trading

    Using Index Futures To Predict The Future

    Want to know whether the stock market will open up or down? Check out the index futures.
  5. Trading

    Reducing Risk With Options

    If you want to use leverage to your advantage, you must know how many contracts to buy.
  6. Trading

    Introduction to Types of Trading: Technical Traders

    Learn about the different traders and explore in detail the broader approach that looks to the past to predict the future.
  7. Investing

    What is an Index?

    An index is a statistical means of calculating a change in an economy or market.
RELATED TERMS
  1. Disparity Index

    A technical indicator that measures the relative position of ...
  2. Currency Arbitrage

    A forex strategy in which a currency trader takes advantage of ...
  3. Overbought

    Overbought: 1. A situation in which the demand for a certain ...
  4. Risk-Free Rate Puzzle - RFRP

    An anomaly in the difference between the lower historic real ...
  5. True Strength Index - TSI

    A technical momentum indicator that helps traders determine overbought ...
  6. Opening Price

    The price at which a security first trades upon the opening of ...
Hot Definitions
  1. Investing

    The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
  2. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  3. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  4. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
Trading Center