Disparity Index

DEFINITION of 'Disparity Index'

A technical indicator that measures the relative position of the most recent closing price to a selected moving average and reports the value as a percentage. A value greater than zero suggests that the asset is gaining upward momentum, while a value less than zero can be interpreted as a sign that selling pressure is increasing.

BREAKING DOWN 'Disparity Index'

Extreme values of this indicator can be a very useful tool for contrarian investors to foretell periods of exhaustion. Once the price is excessively pushed in one direction, there are very few investors to take the other side of the transaction when the participants wish to close their position, ultimately leading to a price reversal. Similar to the ROC indicator, important signals are generated when the indicator crosses over the zero line because it is an early signal that momentum is building.

To learn how to use the disparity index in your trading, check out Why is the disparity index indicator important to contrarian investors?

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RELATED FAQS
  1. Why is the disparity index indicator important to contrarian investors?

    The disparity index is a technical momentum indicator that compares market price to a time-defined moving average of market ... Read Full Answer >>
  2. What are common trading strategies used with the disparity index?

    Technical analysts and traders use the disparity index to spot abnormal or rapid movements in a security's price, showing ... Read Full Answer >>
  3. How do I use the disparity index in forex trading?

    The disparity index is a technical volatility oscillator that evaluates the relationship between current price action and ... Read Full Answer >>
  4. What is the disparity index formula and how is it calculated?

    Steve Nison introduced the disparity index in his book, "Beyond Candlesticks," as a way to analyze price movements in candlestick ... Read Full Answer >>
  5. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  6. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
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