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Herrick Payoff Index
The Herrick Payoff Index uses analyzing of volume, price changes, and open interest changes to determine the amount of money flowing into or out of a futures contract.
When the Index is below zero it shows that money is flowing out of the futures contract and vice versa.
To combine the value of each new day with the value of the previous day a multiplying factor is used. Therefore, the value at the beginning of the data series is zero. The increase and decrease of the value depends on changes in the number of open contracts, the average price for each day, changes in the average price and the amount regulated by the trading volume.
A divergence from the price is the primary signal to watch for. If the indicator is decreasing and prices are increasing, they will usually correct to confirm the indicator.
Herrick Payoff Index is useful for the early spotting of changes in price trend direction. Therefore, use the Payoff Index to distinguish trends that will most likely be short-lived from those that are destined to continue.
The index can also give coincident signals about a significant change in price trend a day or two before it occurs. This advance action is accomplished through use of trading volume and contract open interest to modify the price action. According to some analyses, volume trends often change before a price-trend change. The relationships between the price trend and the trend of open interest are also possible.