What Is The Disparity Index Indicator & How To Trade With It

Disparity Index Indicator

The Disparity Index indicator is based on principles of Disparity Index that measures the relative position of the recent closing price of an asset to moving averages and shows the percentage results. It was developed by Steve Nison and first appeared in his book, “Beyond Candlesticks: New Japanese Charting Techniques Revealed.” When the Disparity Index indicator crosses the zero line, it can signal a change in the trend.

What is the Disparity Index indicator?

The Disparity Index is a momentum indicator. Steve Nison said that the Disparity Index indicator is similar to moving averages, which is a standard indicator for Western traders. He argues that the Disparity Index indicator allows better market periods than MAs.

The equation for the Disparity Index indicator is:

Disparity Index = n-PMAV × 100(Current Market Price − n-PMAV)

​where: PMAV= Period moving average value ​

Disparity Index Indicator on chart
Disparity Index Indicator on chart

How to use the Disparity Index indicator?

Disparity indicator generates trading signals when it crosses the zero line. Due to this, the it works similarly to the ROC (rate of change) indicator, which is also a momentum indicator.

If the Index shows 0, this means that an asset’s current price is equal to the value of n-PMAV. This represents the price of an asset is consistent with the moving average.

If the value is below 0, this means the current price of an asset is below the value of n-PMAV, and the price of an asset is in downward momentum with an increase in selling.

And If the value is above 0, this means the current price is above n-PMAV. This shows the asset is in upward momentum, and the buying pressure is increasing.

Disparity Index Indicator 0 level
Disparity Index Indicator 0 level

As the Disparity Index indicator is an oscillator, there are multiple trading strategies like scalping, day trading, and swing trading. Here we’ll mention once simple and one more advanced strategy.

The first approach is, when the indicator crosses the zero line, we could enter a trend trade. In this instance we would go long when the indicator crosses above 0 and go short when it crosses below 0.

This tells us that the indicator value below 0 is bearish, and above 0 is bullish.

The second trading strategy is a bit complex. When the 14-period Disparity Index indicator is more than 10, the price diverts from the 14-period moving average by more than 10%.

Here the situation becomes tricky because the price is reverting to its mean (mean reversion occurs when the price of an asset moves to its average price over time).

So, in his book, Nison suggested that when this scenario occurs, you should look for reversal patterns like the pin bar and the engulfing.

But the value of the Disparity Index indicator seldom crosses above 5%. It only appears when the market is highly volatile or because of some currency pairs. Here the value crosses above 20%.

Disparity Index trading strategy

By adding Disparity Index indicator to your trading strategy, you can choose overbought and oversold levels according to market conditions and the assets you are trading.

Disparity Index indicator buy strategy

  • The histogram bar should close above the zero line.
  • Wait for the price bar to close bullish before entry.
  • Place the stop-loss near the swing low area.
  • Exit the trade when the histogram bar closes below the zero line.
Disparity Index Indicator buy setup
Disparity Index Indicator buy setup

Disparity Index indicator sell strategy

  • The histogram bar should close above the zero line.
  • Wait for the price bar to close bullish before entry.
  • Place the stop-loss near the swing low area.
  • Exit the trade when the histogram bar closes below the zero line.
Disparity Index Indicator sell setup
Disparity Index Indicator sell setup

Disparity Index indicator Conclusion

The Disparity Index indicator can be a helpful tool for finding overbought and oversold signals. As it is a momentum indicator, it can be helpful to use the Disparity Index indicator with other technical indicators.

I would prefer to use the majority of technical indicators such as the Disparity Index indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Disparity Index indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Disparity Index indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Disparity Index indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!