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The Demand Index is a technical indicator that tries to lead price changes using price and volume data. The indicator was developed by Hames Sibbet.
The demand index formula requires several parameters:
Price: A time series that is usually set to the close price, midpoint or high plus low divided by two.
Constant: A constant value. The default value is 5.
Periods: Lookback period used to calculate simple and exponential moving averages within the formula.
HighLowBars: The number of trading bars used to calculate the highest high value and lowest low value.
Demand Index Calculation:
The formula first calculates the buying and selling pressure then the Demand Index. The returned values vary between 100 and -100.
You can display the demand index formula by first downloading it from this page, select "Tools -> Create Functions" in QuantShare trading software then selecting the function from the list.
Example:
di = DemandIndex(close, 5, 19, 2);
Plot(di, "Demand Index Indicator", colorRed, ChartLine);
The Demand Index indicator is interpreted as follow:
- A top is signaled when the price makes new highs and the Demand Index makes a new low.
- The demand index indicator is performing as a leading indicator when it reaches an extreme peak. This situation is often preceded by prices rally to new highs.
- A crossover of the Demand Index above or below the zero line signals a change in trend.
- A weak price movement is signaled when the Demand Index stays near the zero level for a long period.
- A weakness in price is signaled when a divergence occurs between the stock price and the Demand Index.
- A long term divergence between the stock price and the Demand Index is a sign that prices have reached a major top or a major bottom.
Example: Leading indicator
di = DemandIndex(close, 5, 19, 2);
buy = (di == hhv(di, 250));
// Enter a buy order when the Demand index reaches an extreme peak
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
