How to Use the Demand Index for Smarter Trade Decisions

Most technical indicators and chart patterns focus on price or volume, but the Demand Index trading indicator does something different—it combines both to uncover what’s really driving market movement.

Imagine you’re at an auction. It’s not just the price, but how many people are bidding and how aggressive are they? That’s what the Demand Index tries to capture, it provides traders with a way to measure buying pressure beneath the surface of price action, offering clues about whether trends are supported by genuine interest or running on fumes.

This is why traders looking for an edge, especially those building precision trading systems, use the Demand Index to validate trends, spot bearish divergence, and detect potential turning points before they’re obvious in price alone.

James Sibbet developed the Demand Index, a complex technical indicator that uses price and volume to assess buying and selling pressure. It incorporates over 20 data inputs to calculate, making it more advanced than most technical trading indicators and chart patterns. There are two major approaches to the Demand Index Indicator.

A. Market Breadth Version (Simplified)

This version is based on advancing vs. declining issues.

Formula: Demand Index = (Advancing Issues ÷ Total Issues) × 100

A reading above 50 suggests more buying pressure than selling pressure in the market. Readings closer to 100 indicate near-total market participation on the buy side.

Use case: Traders monitor sustained periods of high readings as confirmation of bullish trends and drops below 50 as a sign of fading demand.

B. Sibbet’s Original Demand Index (Advanced)

The full version developed by James Sibbet is far more intricate. It combines:

• Price and volume to assess market strength

• Directional movement

• Momentum over multiple periods

The result is a complex technical indicator that uses price and volume as a leading indicator. It often peaks or troughs ahead of price, making it particularly effective when used with bullish divergence or bearish divergence analysis. Here are some custom settings available to traders who use the Demand Index.

Six key rules from Sibbet:

The technical indicator was originally published with six rules that traders follow to interpret signals effectively:

1. The divergence between the Demand Index and price is a bearish divergence.
2. Prices often rally to new highs after an extreme peak in the Demand Index numbers.
3. Demand Index and price moving higher while the index weakens may indicate a major top.
4. A move through the zero line indicates a change in trend.
5. Hovering around the zero line suggests weak price action.
6. The long-term divergence between the Demand Index and price predicts a major top or bottom.

This version best suits traders relying on technical indicators and chart patterns for detailed analysis.

Traders want structured, testable strategies that provide a repeatable edge. This is where the Demand Index Indicator fits beautifully. Used correctly, it can become part of a systematic approach to:

• Confirm buying pressure with strong volume support

• Identify early signs of bearish divergence or bullish divergence

• Time exits when selling pressure in the market increases

But here’s the key: Traders can use this information as a leading indicator but must define rules and backtest them rigorously.

For example, a trader might include a rule like:

“Only enter long trades when the 5-day average of the Demand Index is above 60 and price is above the 20-day moving average.”

This ensures the indicator in practice is part of a structured approach rather than a subjective guess.

Despite its strengths, traders often misuse or misinterpret the Demand Index Indicator. Here’s where things go wrong:

Misinterpreting Single Readings

One high or low reading doesn’t mean much on its own. Traders must look at context, recent trends, price action, and volume to assess buying conviction.

Over fitting to Historical Data

Tuning the Demand Index too perfectly to past data often creates systems that fail in live markets. Instead, traders should define rules for using Demand Index that work across various market conditions.

Ignoring Divergences

Divergences between the Demand Index and price are one of its most powerful signals—but they’re subtle. Many traders miss these cues because they focus too much on price or don’t overlay indicators properly.

Using It in Isolation

Like any technical indicator, the Demand Index works best with support or resistance levels or trend filters.

If you’re ready to test the Demand Index in your strategy, here’s how to do it with discipline and clarity:

1. Use Multi-Day Averages
   Smooth out short-term noise by averaging over 3–5 days.
2. Look for Divergences
   If price is rising but the Demand Index is falling, price may be headed for a reversal.
3. Define Entry and Exit Rules

• Enter when Demand Index crosses above 60 and price makes a 10-day high.

• Exit when Demand Index drops below 40 or price breaks a key support or resistance level.

1. 4. Backtest Across Different Markets
      Test the indicator on financial markets like ASX stocks, crypto, or ETFs.
   5. Combine with Trend Filters
      Use technical indicators like moving averages to confirm buying pressure.

The Demand Index Indicator is a complex technical indicator that gives traders a deeper understanding of buying and selling pressure affecting a security. However, the true power of this technical indicator that uses price and volume lies in how you systematically use it.

It’s not enough to know that buying pressure is high. You need:

• Rules for using the Demand Index

• A great baseline for using it in different market conditions

• A way to measure performance across different financial markets

That’s what separates discretionary traders from those using precision trading systems. 

If you want to stop guessing and start trading systematically, start with The Trader Success System. It’s the structured path for traders who want to stop guessing and start growing.