The Disparity Index is a technical indicator that measures the relative position of an asset’s most recent closing price to a specific moving average and reports the value as a percentage. It’s named after its creator William Rees-Mogg and was first described in his book Cranky Numbers in 1999.The idea behind the Disparity Index is that when markets are relatively stable, they tend to fluctuate around some point more often than they deviate from it. In other words, there is a range of prices within which the majority of trading takes place. This range is called the moving average and defines what is referred to as a trend. When an asset moves beyond this defined trend, it appears overbought.Conversely, when an asset moves below this defined trend, it appears oversold. To calculate the Disparity Index, find the latest closing price compared to the defined moving average and divide this figure by the defined moving average itself squared—a formula known as inverse correlation.For example, if an asset’s last trade price was $100 compared to a 10-day moving average of $110, its Disparity Index would be 1.09 or 109%. If there were no defined moving average, then calculating the Disparity Index would be more complex since it would require knowing how often each particular price deviated from the current market price.
