What Is The Summation Index & How To Trade With It

Summation Index

The Summation Index, also known as the McClellan Summation Index, is a breadth technical indicator. It is a long-term version of the Summation Oscillator. It is based on the difference between price advances and declines. The authors of the Summation Index Sherman and Marian McClellan developed it to identify movements in the market rather than looking at the price levels. It was first created for the S & P 500 and Dow Jones, but later, traders started using it in stocks and forex market.

What is the Summation Index?

The Summation Index was developed for medium and long-term trading as it is calculated by using all the values of McClellan Oscillator. The oscillator is used in trend reversals and short-term trading.

Summation Index on a chart
Summation Index on a chart

Thus, by adding all the values of the oscillator, we can calculate the Summation Index.

McClellan Summation Index = Previous periods Summation Index + current periods McClellan Oscillator.

The McClellan Oscillator is based on the 19-day and 39-day exponential moving averages.

Although the Summation Index is based on McClellan Oscillator, it often gives smoother values than the oscillator. It crosses the zero line fewer and cause less divergences.

The Summation Index rises when the McClellan Oscillator is positive and declines when the oscillator is negative.

To push the Summation index above or below the zero line creates positive/negative readings. This is because the Summation Index is slower than the oscillator.

The positive/negative values produce by the oscillator causes the Summation Index to trend higher.

The values of the Summation Index are between -1550 to +1950. But, in the 1960s, the Summation Index stayed between 0 to +2000. The +1000 mark was considered neutral.

With the inclusion of NYSE and the forex market, the Summation Index indicates an uptrend when it crosses +1600 and downtrend when it’s below -1300.

When setting up the Summation Index on MT4, the indicator takes a bit of time to load the required data.

You can use the author’s settings for the indicator are choose your own according to your own trading strategy.

Summation Index parameter setup
Summation Index parameter setup

How to use the Summation Index?

When using the Summation Index, you could look for the hidden divergences and overbought and oversold conditions. The Summation Index requires other technical analysis tools to confirm divergences.

A hidden bullish divergence appears when the price hits the higher low, and the indicator marks the lower low.

Summation Index hidden bullish divergence
Summation Index hidden bullish divergence

 

Hidden bearish divergence emerges when the indicator indicates the higher high, and the price hits the lower high.

Summation Index hidden bearish divergence
Summation Index hidden bearish divergence

 

The Summation Index uses exponential moving averages to help identify the uptrend and downtrend in the market. We mentioned the 19-day and 39-day exponential moving averages, but you can change it according to your preference.

The Index generates signals when it crosses the middle line. If it is above the middle line, then it’s bullish. And, if the Index is below the middle line, it is bearish.

When the bear market is declining and some of the currency pairs or stocks are in decline, the Summation Index shows that the bear market’s end is nearby.

Conversely, if there is a bull market and some of the pairs or stocks are rising, the bull market’s end may be around the corner.

Summation Index Trading Strategy

By using Summation Index in your trading strategy, you can predict whether the market is going to be bearish or bullish.

The use of exponential moving averages with the Summation Index helps simplifies the direction of the trend.

Summation Index buy strategy

  • Wait for the price bar to close bullish before entry.
  • Enter the market when the McClellan oscillator is positive.
  • Put the stop-loss near the swing low area.
  • Exit the trade below the zero line.
Summation Index buy setup
Summation Index buy setup

Summation Index sell strategy

  • Wait for the price bar to close bearish before entry.
  • Enter when McClellan Oscillator is negative.
  • Place the stop-loss near swing low area.
  • Exit above the zero line.
Summation Index sell setup
Summation Index sell setup

Summation Index Conclusion

Although the Summation Index requires other technical analysis tools for displaying signals, it can be a beneficial indicator for helping to identify the bearish and the bullish trend. The indicator is commonly used in stocks, indices trading, but it is also helpful for forex trading.

The Summation Index can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of technical indicators such as the Summation Index 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 Summation Index 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 Summation Index 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 Summation Index, 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!