PTS Demand Index

١٦ أغسطس ٢٠٢٣

PTS Demand Index Indicator for Trading View coded by Precision Trading Systems

This is a complex volume-based indicator which has powerful applications as a leading indicator.

It belongs in Subgraph two under the chart. It ranges from minus 50 to plus 50 hence the reason that zero is significant in its interpretations.
On a regular daily chart of a stock you can consider approximately +29 as overbought and -25 as oversold.

Above zero is considered a bullish uptrend and below zero is seen as a bearish downtrend. This point is more valid on a slower time frame of Demand Index > 50

Shorter lengths of 6-12, etc. offer scalping opportunities for day traders or swing traders when peaks and troughs are encountered at the usual "overbought and oversold" levels similar to using RSI.

At this length you will see frequent crossings of zero as the window of data being examined is tiny.

As a future predictor of price action my preference is the longer lengths from 50 upwards. This makes for a smoother plot without it telling lies by being smoothed. Just increase the length.

They tell stories and show up insider buying and selling in a clear manner. The screenshot is length 200 and shows a power blast signal very well. Because it uses volume, a big volume trade that does not move the price much will often show up in the Demand Index Indicator, warning us of impending rapid price changes.
This is when two big traders or houses buy and sell to each other, both assuming they are right, but obviously one of them will be wrong. It is this wrong person rushing to get out of their position that causes the big move.

This is usually in the direction of the Demand Index move and this is a startling observation and seems to follow the "principle of least action" (PLA), or as Jesse Livermore said, "the price broke very badly on my selling which showed me which was the path of least resistance" . You don't need to take my word for this, just look at the chart.

There are six well known rules to Demand Index, which are widely published but still worth knowing.

However after using this for more than twenty five years I have identified some new "rules" which I will share.

The six "regular" rules

1. Divergences. If the price of a market is making a new low and DI is not this is a positive divergence seen as bullish

2. The extreme peak, this forecasts that price in the underlying market will move higher shortly. (A rare rule)

3. If the market is making new highs and Demand Index is not this is often a sign of a top and is also a bearish divergence

4. If Demand Index crosses above zero this usually signals a change in market trend

5. A long term divergence between prices and DI usually indicate a long term top or bottom is forming.

6. If DI is hovering around zero without much direction it is a sign of an indecisive and weak market lacking gusto.

The five "extra rules" of Demand Index below.

7. "The DI trend line break"

If one draws a trend line on the indicator when one has a nice place to put it that links two or three peaks or troughs together, then it breaks up or down through it, then it often signifies a price break in the same direction.
Demand Index will often signal this price break a few bars ahead of time (Sometimes as much as 10 bars ahead) Making it justified in its title as a "leading indicator" because those who know trade without telling what they know. Demand Index listens and reports it back to you.

8. "DI power blast"

(This is the example in the screenshot which lead to a big move up at 230pm UK time which is the US opening time on the ES SP500 Futures 30 second chart)
This is when a bigger than normal move occurs in DI, it does not have to "cross zero" in the event just that it can be just below or just above. It signals a big move in the direction of the blast. The example shot from -15 up to +5 in a couple of bars which lead to a 14 point move up in the futures a few minutes later.

9. "DI congestion break out"

A congested area in DI, such as is described of a stock price in a narrow range break out known as "NR" is a valid signal when emerging up or down from this range and predicts a move in that direction from the market studied.

10. "Failed zero break"

If a market is far above zero and falls down to it just puncturing it then rises up again, this is a bullish sign and a sign of a supportive market. The same applies to the vice versa signal. It acts as support and resistance often.
To be cautious you can use a plus or minus 2 or 3 as the threshold instead of zero, to give less fake signals.

11. "DI Support and resistance"

This one takes more of a deeper look. If you see a level of DI acting as support and draw a line across the subgraph two chart then you can sometimes see that this acts as support again even though the market price is totally different. A strange phenomenon but worth looking for. The same applies for resistance in the vice versa argument.

The original Demand Index formula has been adhered to exactly as it was designed without any deviations, smoothing or added parameters.

I was unable to find another script on Trading View which followed it exactly when checking against my other versions.

According to legend, the designer of this indicator Mr James Sibbet called a very big move in the Silver futures markets back in 1979 which was reported in his weekly newsletter called "Let's Talk Silver & Gold".
It was called the Silver short squeeze and the price doubled in just a few months. As a designer of trading software myself since 2006 I can say Demand Index is truly an elegant work of art.

More about divergences

Having studied many technical indicators over the years I have formed the opinion that Demand Index is the best of the best for finding meaningful divergences.
This indicator needs volume to work correctly at its best.
You can still use it on indices and Forex but as the essential volume element is missing the results will be less than optimal.
It will "work" as the library code assigns a volume of 1 if no volume is found on the symbol used.
The best markets are those with a lot of volume and a lot of players arguing over the direction.

Liquid futures and stocks do well with this indicator.

Please remember to use risk management and stop losses as not every signal will win.

Thanks for reading and good luck with using it on Trading View

Roger Medcalf - Precision Trading Systems