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Herrick
Payoff Index
Description
The
Herrick Payoff Index is used to analyze futures
and commodities. Because
the Index uses open interest in its calculations,
the security must contain open interest.
Briefly,
the calculation of the Herrick Payoff Index
involves computing the mean price for each day and
then using this information to compute the
difference in mean prices for each day.
The flow of money into, or out of, the
commodity is then computed by multiplying the
change in the mean prices by the day's volume to
arrive at a total change in dollars for the day.
MetaStock
Pro uses the dollar value of a one cent
move (input by the user) to modify the "money
flow" by changes in open interest.
The daily values of the "modulated
dollar amount" are then smoothed with an
exponential moving average.
According
to Herrick, the recommended input for "the
value of a one cent move" is "100"
for most commodities.
The only exception is for Silver, which
should be "50."
Before
the Herrick Payoff Index is calculated, you will
be prompted to enter a smoothing factor known as
the "multiplying factor."
The multiplying factor is part of a complex
smoothing mechanism.
However, the results are similar to the
smoothing obtained by a moving average.
For example, a multiplying factor of ten
produces results similar to a 10-period moving
average.
Interpretation
The interpretation
of the Herrick Payoff Index involves visually
comparing the action of the Index with the price
while looking for divergences and convergences.
An example divergence would be increasing
prices while the Index is falling.
An example convergence would be decreasing
prices while the Index is rising.
Tip
Open interest is
usually not available for the most recent day.
Thus, the right most data point of the
Herrick Payoff Index is usually blank. |
