The Disparity Index is a technical indicator that measures the relationship between the current price of an asset over its moving average. Its development is attributed to Steve Nison based on his book Beyond Candlestick.
The Disparity Index can take positive and negative values. A positive value indicates that the asset price is increasing rapidly, while negative values indicate that the price is falling. A value of zero indicates that the current price of the asset moves in line with the moving average.
When the Disparity Index crosses the zero level that reflects a rapid change in price direction and thus it can be taking an early indicator of increased momentum (force) in the direction indicated.
In Nison’s book the author suggests that the Disparity Index can also indicate if the analized asset is in a overbought or oversold state in cases of high positive levels or very low negative levels. It can therefore be used as a filter to predict the end of a trend-cycle, or at least possible stops in the path of a trend (phase stabilization, pullbacks, etc).
Calculation and formula of the Disparity Index
The formula and method of calculating of the Disparity Index is quite simple, just subtract from the nearer closing price the value of the selected moving average value of the current period and convert the result to a percentage value taken as 100% the value of the moving average.
Interpretation and use of the Disparity Index
As mentioned in the introductory definition of this index, it is measured in percentages of both negative and positive values. Their values varies from -100 to +100 and can be interpreted as follows:
- Positive values indicate that the price of the analized asset is increasing at a significant rate. The higher the indicator value, the greater the price increase
- Negative values indicate that the price of the analized asset is decreasing at a considerable speed. The lower the indicator value, the greater the price decrease.
- Crosses of the 0 Level (zero): If the Disparity Index crosses the zero level from any direction, it indicates a rapid change in the trend of the instrument traded. It is a very early sign of increased momentum.
