Demand Index, DI, incorporates price and volume to give a ratio of buying pressure to selling pressure.
- DI is often a leading indicator of price change, based on the general observation that volume tends to peak before prices do.
- 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.
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.
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.