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Demand Index
Demand Index, DI, incorporates price and volume
to give a ratio of buying pressure to selling pressure.
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DI is often a leading indicator of price change,
based on the general observation that volume tends to peak before
prices do.
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DI can be used with both daily and weekly data
DI is charted on an open scale and fluctuates above
and below a zero line. When buying pressure is greater than selling
pressure, the DI is above the zero line and vice versa. DI is one
of the early volume indicators, developed in the 1970s by James Sibbet.
Interpretation
Several levels of interpretation can be used to help
analyze the underlying trend.
Thomas Aspray, an experienced trader, suggests using
DI in three formats:
- Plotting buying pressure (BP) and selling pressure (SP) as
separate lines.
- Deriving an oscillator of the BP/SP which he calls the Demand
Oscillator (charted as an histogram), and,
- The DI line itself (which can be charted as a line or as an
histogram - although trendlines are more easily drawn on DI as
a line)
Many experienced traders feel that weekly studies can
be particularly important in identifying the predominant trend, and
DI is often assessed using weekly data.
Signals
DI offers the following types of signals:
- Divergences between DI and price. A divergence between
the DI and prices suggests an approaching change in the price
trend.
- Trendline analysis of DI showing levels of support/resistance,
can help determine changes in trend. As a leading indicator DI
trendlines are often broken ahead of price trendlines
- Zero-line crossings can confirm previous signals as
a lagging indicator.
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