What is the 'Toraku Index'

A toraku index is a technical indicator that compares the number of advancing stocks on the Tokyo Stock Exchange to the number that are declining. Dividing the two results in a ratio that is used by technical traders to determine the likelihood of a market correction. A market correction occurs when the stock market sees a reverse moment of a stock, bond, commodity or index by an at least 10 percent overvaluation adjustment.

BREAKING DOWN 'Toraku Index'

A toraku index is an indicator that would be classified as a market breadth indicator because it only incorporates the number of advancing and declining issues to determine the broad support of any given move. It is able to reveal the exact direction the traders are taking, with positive sentiments equaling increased purchasing and negative sentiments leading to more sales. Other types of breadth indicators include the advance-decline index, cumulative volume index, McClellan oscillator and Haurlan index.

Overall, breath indicators use mathematical formulas to measure advancing and declining security prices as part of market movement to derive the sentiment of the overall market. The formulas can reveal overall market sentiments as bullish or bearish.

Breadth indicators are mathematical formulas that measure advancing and declining issues to calculate the amount of participation in a market movement. By evaluating how many securities are increasing or decreasing in price, and how many trades investors are placing for these securities, breadth indicators can show whether overall market sentiment is bullish or bearish.

Advantages and Disadvantages of the Toraku Index

The toraku index, like other market breath indicators, don’t look at specific stocks or investments’ value. Instead, they work as an overall summary of the market as a whole. Thus, market breath indexes such as the toraku index can be helpful in getting a picture of the whole stock market and predicting trends and stock movement, but they may also have the disadvantage of leading to missed opportunities for individual stocks.

Indexes as a way to glean information about stock market trends were first introduced in 1896 by Charles Dow and very quickly, they changed how investors approached the stock market. Dow’s calculations helped himself and other leading investors measure what he thought of as the market’s tide going up or receding. Of course, the calculations used to determine the indexes of the stock market have since changed drastically to become more accurate and take into account individual stock movement and throw out outliers.

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