Disparity Index: A chart of percentages based on the difference between a stock's price and a selected moving average.
Example 1: If Stock Price = $100 and Moving Average = $110, then Disparity = 110% (or +10%)
Example 2: If Stock Price = $100 and Moving Average = $90, then Disparity = 90% (or -10%)
The Problem
Typically when using a Disparity Index, you eyeball where the outer bands are. Stock A and Stock B can have completely different outer bands.
Example 1: Stock A's Disparity is within the range of 95%–105% say 90% of the time. Which means if the Disparity is under 95% or over 105%, the stock price is very likely to correct up or down respectively.
Example 2: Stock B's Disparity is within the range of 85%–105% say 90% of the time. Which means if the Disparity is under 85% or over 105%, the stock price is very likely to correct up or down respectively.
So, how do I have these outer bands of the Disparity Index determined mathematically, as opposed to eyeballing where they are for every single stock I look at?
Example 1: If Stock Price = $100 and Moving Average = $110, then Disparity = 110% (or +10%)
Example 2: If Stock Price = $100 and Moving Average = $90, then Disparity = 90% (or -10%)
The Problem
Typically when using a Disparity Index, you eyeball where the outer bands are. Stock A and Stock B can have completely different outer bands.
Example 1: Stock A's Disparity is within the range of 95%–105% say 90% of the time. Which means if the Disparity is under 95% or over 105%, the stock price is very likely to correct up or down respectively.
Example 2: Stock B's Disparity is within the range of 85%–105% say 90% of the time. Which means if the Disparity is under 85% or over 105%, the stock price is very likely to correct up or down respectively.
So, how do I have these outer bands of the Disparity Index determined mathematically, as opposed to eyeballing where they are for every single stock I look at?