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