Momentum & oscillatorsDisparity Index
The percentage gap between price and a moving average — a read on how stretched the market is from its own trend line.
Works in most conditionsEngine-computed on a fixed sample series
What it is
The Disparity Index measures, as a simple percentage, how far the current price has strayed from its own moving average. Popularised in the West through the work of Steve Nison on Japanese techniques, it turns the distance between price and a mean into a single oscillating number: positive when price is above the average and negative when below. The magnitude tells you how stretched the market is — a large positive value means price has run well ahead of its trend line, and a large negative value means it has dropped well below. For a beginner, the intuition is a rubber band: the Disparity Index measures how far the band has been pulled from its resting point, hinting at the tension that might snap it back. It answers the question, how overextended is this market relative to its own recent average? It is essentially a normalised, percentage version of the gap you can see between price and a moving average on the chart.
How it is calculated
The formula is refreshingly direct: take the current close, subtract the moving average, divide by that same moving average, and multiply by 100 to express the result as a percentage. In symbols, it is the close minus the moving average, all divided by the moving average, times one hundred. The moving average is usually a simple moving average, and a 14-period length is a common default, though any length can be used. A reading of plus three means price is trading three percent above its average; a reading of minus two means two percent below. Because the gap is divided by the average, the output is scaled to price, which makes readings on the same instrument comparable over time even as the price level changes. There is nothing more to it than that single percentage-distance calculation, which is part of its appeal.
Reading it, step by step
First, the sign: a positive Disparity Index places price above its average and a negative value below, so a cross of the zero line is the exact moment price crosses its moving average. Second, the magnitude: the further the index travels from zero, the more stretched the market is, and readings near recent extremes warn that a snap-back toward the mean is increasingly likely. Third, context matters because there is no universal overbought or oversold level — how far a given instrument can stretch depends on its volatility, so you calibrate the extremes to its own recent history rather than to a fixed number. Fourth, watch for divergence: if price makes a new high while the Disparity Index makes a lower high, the move is losing its stretch and may be fading. A sustained positive reading, by contrast, can simply confirm that a strong uptrend is intact, so magnitude must always be read against the instrument's normal range.
Best timeframes and settings
A 14-period simple moving average is the usual base, and the Disparity Index works across intraday, daily, and weekly charts because the percentage framing scales naturally to any timeframe. Shortening the moving average makes the index faster and noisier, reacting to every minor wiggle, while lengthening it produces a smoother, slower read that only flags larger dislocations. Mean-reversion traders on faster charts often shorten the average to catch quicker snap-backs, while position traders lengthen it to focus on major overextensions. The critical setting is not really the length but the extreme thresholds, which must be derived from the specific instrument's history rather than borrowed from another market. A volatile small-cap might routinely stretch to plus or minus eight percent, while a stable index might rarely exceed plus or minus three, so the same numeric reading means very different things across instruments.
When and where to use it
The Disparity Index is versatile enough to serve in any regime, but it is used in two opposite ways depending on context. In a ranging market it is a mean-reversion tool, flagging when price has stretched too far from its average and is prone to revert. In a trending market it flips into a confirmation tool, where a sustained positive reading confirms strength and staying long, rather than a signal to fade. It applies across equities, FX, and commodities. The danger is using the mean-reversion interpretation during a powerful trend, where the index can stay stretched far longer than a reversion trader expects, handing out losses on every early fade. So the first job is always to identify the regime, and only then decide whether an extreme reading is an invitation to fade or a reason to stay with the move.
Strategies that use it
The first strategy is classic mean reversion: in a range, sell when the index reaches a historically high positive extreme and buy when it reaches a historically low negative extreme, targeting a move back toward zero with a stop beyond the recent extreme. The second is trend confirmation: in an uptrend, use a sustained positive reading as permission to stay long and to add on pullbacks that bring the index back near zero without turning negative, exiting if it flips firmly negative. The third is a divergence play: when price makes a new extreme but the Disparity Index does not, fade the move on the expectation that the stretch is exhausting, using the failure of the index to confirm as the trigger. Across all three, the instrument-specific calibration of the extremes is what separates a workable rule from a guess, so backtest the thresholds on the actual market you trade.
Combining it with other indicators
Because the Disparity Index is a stretch-from-mean gauge, it complements tools that define the trend and the location. A longer moving average or the ADX tells you whether you are in a trend, which decides whether to fade or follow an extreme reading. Support and resistance levels give a mean-reversion fade a logical target and a trend-confirmation entry a logical backstop. Other momentum oscillators such as RSI or the MACD can corroborate a divergence, strengthening the case that a stretched move is failing. Volume adds another layer, since an overextended push on fading volume is more likely to revert. The general recipe is to let a trend filter arbitrate the regime, let price levels frame the targets, and use the Disparity Index to time the stretch.
Where it fails
The signature failure is fading a strong trend: because there is no fixed ceiling, the index can remain deeply positive or negative while price keeps trending, stopping out mean-reversion traders who assumed an extreme had to revert. Borrowing overbought and oversold thresholds from one instrument and applying them to another is a related mistake, since each market's normal stretch differs. On very short averages the index becomes noisy and its zero crosses whipsaw. The fixes are to calibrate the extremes to the specific instrument's recent history, to only apply the mean-reversion interpretation once a ranging regime is confirmed, and to switch to the confirmation interpretation the moment a trend takes hold. Never treat a single stretched reading as an automatic reversal — it is a heightened probability at best, and in a trend it can be the opposite of a reversal signal.
A worked example
Suppose a stock closes at 105 while its 14-period simple moving average sits at 100. The Disparity Index is 105 minus 100, divided by 100, times one hundred, which is plus five percent. Checking the last year of data, you note this particular stock has topped out near plus six to seven percent before reverting on most occasions, so plus five is getting stretched but not yet extreme. A few days later price pushes to 107 while the average has only risen to 101, giving a reading of about plus five point nine percent — right at the historical ceiling — and at the same time the RSI prints a lower high than on the previous rally. Reading the two together, a mean-reversion trader in this ranging stock sells into the stretch, targeting a move back toward the average near 101 with a stop above the recent high, and the subsequent pullback toward the mean rewards the trade. Had the same stock instead been in a confirmed uptrend, the trader would have treated the sustained positive reading as a reason to stay long rather than to fade.