What Is Herrick Payoff Index
The Herrick Payoff Index tracks price, volume, and open interest to identify potential trends and reversals in futures and options markets. Traders often use the indicator as a measure of crowd psychology.
Breaking Down Herrick Payoff Index
The Herrick Payoff Index tracks price, volume, and open interest to generate bullish and bearish signals. Since open interest is used in the calculation, the technical indicator can only be used in options and futures markets. Most traders use the Herrick Payoff Index as a measure of crowd psychology in the futures and options markets where there is less liquidity than the equity markets and more potential for volatility over time.
Bullish continuation signals are generated when prices and open interest are on the rise, since traders are increasingly buying into the contract. In addition, a contract may be poised for a bullish reversal when prices and open interest are falling in tandem, since selling pressure is declining as prices are becoming increasingly attractive.
Bearish continuation signals are generated when prices are falling, and open interest is on the rise, since traders are increasingly placing bearish bets. In addition, a contract may be poised for a bearish reversal when prices are rising, and open interest is falling, which indicates that bullish traders are losing momentum.
In general, bullish traders are in control when the indicator is above the center line and bearish traders are in control when the indicator is below the center line. However, traders should use the indicator in conjunction with other technical indicators or chart patterns to maximize their odds of placing successful trades.
Herrick Payoff Index Characteristics
1. Provides a reliable measurement of the contract's overall bullishness or bearishness.
2. Bulls are in control when HPI rises above the center line while bears are in control when HPI drops below the center line.
3. Applies data from a period of at least three weeks.
4. Is applied to prices of the most active delivery month.
5. Utilizes mean prices, rather than closing prices.
6. When volume increases, the absolute HPI value also increases.
7. Rising open interest is bullish in an uptrend and bearish in a downtrend.
8. Falling open interest is bearish in an uptrend and bullish in a downtrend.
9. Flat open interest is neutral.
10. HPI generates a leading signal when it breaks a longer-term trendline. The new trend is confirmed when HPI crosses the center line.
11. A bullish divergence arises when prices reach a new low and HPI volume rises, issuing a buy signal.
12. A bearish divergence arises when prices hit a new high while HPI posts a lower high, issuing a sell signal.