Herrick Payoff Index or HPI indicator
Herrick Payoff Index (HPI) indicator is an indicator for futures and options traders which can be used to confirm trends and to predict trend changes. The indicator was developed by John Herrick, and was limited early to only some traders; in early 1980s it became more popular among traders. HPI is a complex indicator and this necessitates the use of a computer. The formula is
Where K is today’s HPI and Ky is yesterdays HPI
M is today’s mean price ((high + low)/2) and My is yesterdays mean price.
C is the value of one cent move or a constant for all contracts.
V is today’s trading volume.
I is the difference between today’s and yesterdays open interest (absolute value). And
G is the greater of today’s and yesterday’s open interest.
At least three weeks of data is needed for successful trend interpreting. HPI can only be applied to daily data; not to weekly or intraday data. When HPI is above the centerline, the trend is considered bullish and when HPI is below the centerline, the trend is considered bearish. In simple, rising open interest in a uptrend is a bullish signals and in a downtrend is a bearish signal and vice versa. Trends are confirmed when price and HPI is in same direction.
The divergences between HPI and price are important signals. Bullish divergence is identified when price is at a new bottom but HPI has a higher bottom than previous bottom. Similarly bearish divergence is identified when price is at a new high but HPI has a lower top.
Herrick Payoff Index is considered as a good indicator because it also considers open interest in addition to price and volume. The downsides are it is complex and can only be used with instruments having open interest (futures and options).
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HPI (K) = Ky + [(M – My) x C x V] x [1 + (2 x I/G)]
Where K is today’s HPI and Ky is yesterdays HPI
M is today’s mean price ((high + low)/2) and My is yesterdays mean price.
C is the value of one cent move or a constant for all contracts.
V is today’s trading volume.
I is the difference between today’s and yesterdays open interest (absolute value). And
G is the greater of today’s and yesterday’s open interest.
At least three weeks of data is needed for successful trend interpreting. HPI can only be applied to daily data; not to weekly or intraday data. When HPI is above the centerline, the trend is considered bullish and when HPI is below the centerline, the trend is considered bearish. In simple, rising open interest in a uptrend is a bullish signals and in a downtrend is a bearish signal and vice versa. Trends are confirmed when price and HPI is in same direction.
The divergences between HPI and price are important signals. Bullish divergence is identified when price is at a new bottom but HPI has a higher bottom than previous bottom. Similarly bearish divergence is identified when price is at a new high but HPI has a lower top.
Herrick Payoff Index is considered as a good indicator because it also considers open interest in addition to price and volume. The downsides are it is complex and can only be used with instruments having open interest (futures and options).
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by NobleTrading at
9:54 AM
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