the daily chartist

Trading strategy using the DeMarker indicator

published 2 years ago

What is the DeMarker Indicator?

The DeMarker indicator, also known as DeM, is a technical analysis tool that compares the most recent maximum and minimum prices to the previous period's equivalent price to measure the demand of the underlying asset. From this comparison, it aims to assess the directional bias of the market. It is a member of the oscillator family of technical indicators and based on principles promoted by technical analyst Thomas DeMark.

The DeMarker indicator helps traders determine when to enter a market, or when to buy or sell an asset, to capitalize on probable imminent price trends. It is considered a “leading” indicator because its signals forecast an imminent change in price trend. This indicator is often used in combination with other signals and is generally used to determine price exhaustion, identify market tops and bottoms and assess risk levels. Although the DeMarker indicator was originally created with daily price bars in mind, it can be applied to any time frame, since it is based on relative price data.

Unlike the Relative Strength Index (RSI), which is perhaps the best-known oscillator, the DeMarker indicator focuses on intra-period highs and lows rather than closing levels. One of its main benefits is that, like the RSI, it is less prone to distortions like those seen in indicators like the Rate of Change (ROC), in which erratic price movements at the start of the analysis window can cause sudden shifts in the momentum line, even if the current price has barely changed.

DeMarker Indicator Trading Strategy

The DeMarker indicator is composed of a single fluctuating curve and does not use smoothed data. The default time span for the calculation of the indicator is 14 periods, and as the number of periods increases, the indicator curve becomes smoother. Conversely, the curve becomes more responsive to smaller numbers of periods.

This oscillator is bounded between values of zero and one and has a base value of 0.5, although some variants of the indicator have a 100 to -100 scale. The indicator typically has lines drawn at both the 0.30 and 0.70 values as warning signals that a price turn is imminent. Values exceeding either boundary are considered riskier and more volatile, while values within are considered low risk. Generally, values above 0.60 are indicative of lower volatility and risk, while a reading below 0.40 is a sign that risk is increasing. Overbought and oversold conditions are likely to be imminent when the curve crosses beyond these boundary lines.

On the example here we have the EUR/USD pair on H4 chart. DeMarket is applied with the standard 14-period option. I know it looks like a mess, but I will try to explain. So first we have signal 1 which is a sell signal as we are following the DeMarker with no doubts. In this case, I am placing the stop between 30 and 40 pips as an appropriate level. As we have sold we can see that the price has pushed up in a choppy trade so our SL is hit for -47 pips. Then we have signals 2 and 3. We can catch them with two short positions down towards where we find signal 5 for a new buy one. We close the positions for rouglhy + 242 pips. We are buying, but the price moves down against us and our SL is hit against at -38 pips. We buy again on signal 6 with another SL hit on -31 pips. Signal 7 is a buy one again where we can close to the other signal for a profit of +137 pips. Signal 8 is a sell one, but our SL is hit at -31 pips. On point 9 we sell the pair and we close it at the next buying reversal for +97 pips. Signal 10 is an SL hit for -34 pips and the price goes down. Signal 11 is again an SL for -36 pips. Signal 12 a fresh buy signal where we can close the position on the next crossover for +77 pips. And we can open a sell one which is ongoing now for +42 pips and an SL 30 pips above.

Overall we have total SL for -217 pips and our profits are for 553 pips. Our net profit here is 336 pips which is not bad from the end of September until now with the live one on +42 pips profit at point 13. Depending on your leverage, money management and lot size, 336 pips can be a very, very good profit for a month and a half swing trading on the 4H chart.

The DeMarker is a good oscillator, but don't use it as standalone. I am encouraging you to try in different pairs, stocks, indexes and commodities as well, chart time frames and with different parameters as well and with combination with other indicators to filter out the fake ones and to search for confirmation. Try it!