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

## 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.

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%.

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.