Hello dear friends. It is likely that everyone knows that Forex is the most attractive and promising financial market in the world. To succeed in such markets and gain financial freedom, it takes time and effort. Gaining a good grasp of the financial market requires that we definitely learn the fundamentals of the market, technical analysis, fundamental analysis, and basic economic concepts. When trading, we frequently use technical indicators, which are part of technical analysis. Indicators provide us with exceptional clues to predict price movements, identify trends, and determine overbought or oversold levels. One of these technical indicators that we will now discuss is the Demand Index (DI) indicator.
What is the Demand Index Indicator?
The Demand Index indicator was invented by James Sibbet. This indicator is designed to measure price momentum and the balance between supply and demand. J. Sibbet introduced the Demand Index in 1981, and it has since become a tool mostly used, especially in stock and futures markets. Besides that, we can use the Demand Index indicator to measure the demand for a currency pair. The Demand Index shows how demand for a commodity or service changes over time. For example, the index can calculate the ratio of demand for a specific period compared to a base year. If the demand index for a commodity or service is increasing, it may be expected that the demand for that commodity or service is also increasing. The Demand Index combines price momentum and volume effects, providing us with a more accurate and comprehensive perspective to support our trading decisions.
Components of the Demand Index Indicator
The structure of the indicator is simple and is usually represented as a line chart. Here are the components of the Demand Index:
Demand Index Line. The Demand Index is plotted as a line chart. This line shows the calculated Demand Index values over time. We use Demand Index values to interpret the relationship between price movements and volume.
Zero Line. The Demand Index usually fluctuates around a zero line. Positive Demand Index values are located above the zero line, while negative values are below it. This indicates the direction of price movements and which direction is stronger.
Calculation of the Demand Index Indicator
The Demand Index is used to show how price movement relates
to volume. A positive Demand Index indicates that price increases are supported
by volume, while a negative Demand Index indicates that price declines are
supported by volume. The main formula used to calculate the Demand Index is as
follows:
Demand Index = Price Change / Volume
In this formula, "Price Change" represents the
difference in closing prices from one period to another, and "Volume"
represents the daily trading volume during the same period. When calculating
Price Change, the first step is to calculate daily price changes, typically
done by taking the difference between the closing price of the current period
and the closing price of the previous period. Often, this calculation is
expressed using the formula (Price Change = Current Closing Price - Previous
Closing Price). After that, we calculate the daily trading volume during the
same period. Trading volume represents the total amount of trading that
occurred during that period.
The Demand Index formula is designed to measure the balance between buying and selling pressure by combining both price movement and trading volume. Traders often rely on the Demand Index formula to determine whether demand is increasing or weakening during a trend. When applied correctly, the Demand Index formula helps identify anticipated turning points in the market by showing when volume is supporting or contradicting price action.
One of the main advantages of using the Demand Index formula is its ability to detect hidden strength or weakness that may not be visible on standard price charts. Because the indicator integrates volume into its calculation, the Demand Index formula provides a more complete assessment of market dynamics. As a result, many technical analysts consider the Demand Index formula a valuable tool for confirming breakouts, trend continuations, and emerging reversals.
Demand Index (DI) Indicator in Trading
The Demand Index indicator is one of the technical analysis
tools that helps identify market trends and possible reversal points. When
trading in financial markets, we can use this indicator to capture buy and sell
signals. When the Demand Index line (the blue line in the picture below)
crosses the zero line (the pink line in the picture below), it may signify a change
in the market trend. The transition from negative to positive, meaning the blue
line crossing above the pink line, would trigger a Buy order. This indicates
the beginning of an uptrend or a weakening of a downtrend, and it could also
signal a temporary pullback in a downtrend. On the contrary, a transition from
positive to negative can signal that an uptrend is weakening, reversing, or
experiencing a pullback. This is the time to enter a Sell order. Take a look at
the example on the USD/CAD chart below:
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| Trading with DI in the USD/CAD chart |
Similar to other technical indicators, we can trade using the
Demand Index indicator by identifying divergences between the price chart and
the indicator. I have previously discussed how to trade with divergence types
in my previous article. If you wish, you can review 'Divergences' here. Here is
another example of a divergence trade on the 4-hour EUR/CAD chart:
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| Divergence trading with DI in the EUR/CAD |
A Demand Index trading strategy enables traders read how volume and price move together during market swings. Many traders use a Demand Index trading strategy to see whether buyers or sellers are gaining the upper hand as a trend continues. When the indicator rises, a Demand Index trading strategy may focus on spotting early entries in the direction of the move. A further use of a Demand Index trading strategy is to filter false breakouts. If price moves in one direction but the indicator does not support it, traders may step back and wait for clearer signs. In this way, a Demand Index trading strategy allows traders to build more confidence in their setups by checking both price and volume before taking action.
❕ Remember that while technical analysis indicators can assist in predicting market movements, they may not always provide precise results. Since market conditions are variable, caution should be exercised and risk management strategies should be implemented when making buying and selling decisions. No indicator, including the Demand Index indicator, can create a trading strategy on its own. It should always be used in combination with other indicators and considerations of fundamental analysis.