Disparity Index is a technical momentum indicator that compares the current market price with the moving average of price over a particular time period. When disparity index indicator is calculated, it is done for a specific time period. Thus, the current price trend with respect to moving average of a longer time period is easily identified. A security is overbought when the index shows a value greater or equal to the upper bound level. Similarly, the security is believed to be in the oversold zone when the index value is lower than the lower bound level. Users can attach this indicator easily into Zerodha Kite charts.
How to setup Disparity Index indicator in Zerodha Kite?
- Go to MarketWatch.
- Choose the stock you are going to trade.
- Right click on the stock and select chart from graphic icons.
- Chart window of the stock opens.
- Go to studies. Select studies.
- Go to Disparity Index indicator and click on it.
- A small window opens with default parameters of the indicator.
- Once the parameters are selected the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on the stock price.
- By default, the indicator uses a 14-period simple moving average for calculations which can be customized.
- Traders can create buy/ sell positions by identifying short term overbought/ oversold positions.
- One should exit the current position once the buy/ sell stop loss is taken off.
How to trade using Disparity Index?
- The indicator works well in all time frames.
- The picture above shows Reliance stock price movement with the indicator.
- The chart shows 1 min. timeframe.
- A buy position is created when the index goes near the bottom and retraces.
- The buy position is closed when the stock price comes down after reaching the top.
- In 1 minute chart, traders may find many whipsaws which will be eliminated if longer time frames are used and this indicator is used with a combination of other indicators.
Once again this technical indicator is basically an oscillator. So there are 2 ways to trade this disparity index indicator. The first approach is using the overbought and oversold zone. Extreme values of this indicator can be used for predicting possible market reversal points. The other approach is to enter a trend trade when the indicator crosses the zero line. Go long when the indicator crosses above zero and go short when it crosses below zero.