What Is Demand Index

The Demand Index is a complex technical indicator that uses price and volume to assess buying and selling pressure affecting a security.

Breaking Down Demand Index

The Demand Index is a complex technical indicator developed by James Sibbet that utilizes over 20 columns of data to measure the ratio of buying pressure to selling pressure. Traders can use this information as a leading indicator that predicts where a security’s price may be headed over the near- and long-term.

Six Rules For Demand Index

James Sibbet established six rules for using Demand Index when the technical indicator was originally published. While traders may use variations of these rules, they serve as a great baseline for using the indicator in practice.

The six rules are as follows:

  1. A divergence between the Demand Index and price is a bearish indication.
  2. Prices often rally to new highs following an extreme peak in the Demand Index.
  3. Higher prices with a low Demand Index often indicate a top in the market.
  4. The Demand Index moving through the zero line suggests a change in trend.
  5. The Demand Index remaining near the zero line indicates weak price movement that won’t last long.
  6. A long-term divergence between the Demand Index and price predicts a major top or bottom.

Traders should use the Demand Index in conjunction with other technical indicators and chart patterns to maximize their odds of success.

Demand Index Example

Demand Index Example
Source: TradingView.

Demand Index hits four peaks in the first 9 months of 2018. The security tops out about two weeks after the first peak in January 2018, giving way to a major decline that drops the indicator into the bottom of the panel at the same time the decline comes to an end. A second peak in March precedes an intermediate top by less than a week. Both indicator and security then lose ground in a pullback that lasts into late April. Demand Index surges higher in May, posting a third peak a few weeks later.

The security continues to gain ground for another month, indicating a potential false reversal signal. However, Demand Index bounces at the zero line, indicating the uptrend has not changed. A fourth peak in July has little effect, with higher prices well into August. 

The Bottom Line

The Demand Index is a complex technical indicator that uses price and volume to assess buying and selling pressure affecting a security. The creator, James Sibbet, suggests six rules when using the indicator as a starting point for market analysis.