Using the Disparity Index for Reversals, Trend Reading, and Divergence
Summary
The Disparity Index is presented as a way to identify prices that have moved unusually far from a reference level, helping traders decide when to look for reversal setups. The described version calculates each bar’s absolute percentage price change, averages those changes over a chosen period, and scales the average to set dynamic overbought and oversold thresholds. A fixed threshold is offered as an alternative, with its value depending on the market and indicator settings.
The suggested uses are to look for bearish candlestick patterns after the index rises above the overbought threshold, and bullish patterns after it drops below the oversold threshold. Within the thresholds, a rising index is described as indicating bullish conditions and a falling index bearish conditions; divergence trading is another proposed application. The document gives no backtest, performance evidence, or precise parameter guidance, so these uses are indicator interpretations rather than validated trading rules.
Key ideas
- The indicator sets dynamic thresholds from the average absolute percentage price change over a selected period.
- An overbought reading is a cue to look for bearish candlestick reversal patterns.
- An oversold reading is a cue to look for bullish candlestick reversal patterns.
- Within the thresholds, the index’s direction is proposed as a way to read trend direction.
- Divergence is mentioned as another possible application, without supporting performance evidence.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.