DeMarker Indicator: How to Use It
Technical analysis is one of the most important tools of a trader. That’s how traders manage to analyze the market and find assets to invest in.
The other tool is a fundamental analysis that relies on geopolitical and economic news to determine the direction of an asset and its price.
Both fundamental and technical analysis is critical. This article is dedicated to usage instructions for the DeMarker indicator. Keep reading our article to learn more about the tool and how to use the DeMarker indicator.
What is DeMarker?
The DeMarker (DeM) indicator is a tool that helps traders to figure out when to enter a market. It also enables traders to find entry and exit points. DeM is considered a leading tool since it shows signals of an oncoming switch in a price trend.
Traders mainly use DeM as part of a combination with other tools and signals. Typically, DeM helps to identify:
- price exhaustion
- market tops
- analyze risk levels.
The creator of DeMarker came up with this indicator to help determine daily price bars, but today, traders use it for any period because it is based on relative price data.
DeM allows you to focus more on intra-period highs and lows, not on closing levels of the market. That’s the difference between DeM and another highly popular tool Relative Strength Index (RSI).
Unlike RSI, DeM is less prone to any “noise” within the market. That’s what makes DeM better than such indicators as the Rate of Change (ROC). The ROC indicator offers unsteady price behavior at the beginning of the trader’s analysis. It’s a dangerous situation since it can cause unexpected shifts in the momentum line, even though, in reality, the price hasn’t changed.
The DeM indicator can be used on most financial markets, including Forex. It was created by Demark when computers weren’t as popular as today. The indicator uses changing values from 0 to 1.
The problem of false signals can be filtered by taking the highest high of the current day and comparing it with the previous day. Traders have to take into account only the maximum that is the highest. All other maximum values aren’t considered and are equal to zero. Here’s the formula:
DMmax = DMmax(current period) – DMmax(previous period)
Provided a trader is using only the highest maximum values. Then the trader has to check the previous period to find the lowest low and then the current period. It works similarly as the example with the highest maximum, and here’s the formula:
DMmin = DMmin(previous period) – DMmin(current period)
Provided the trader used the lowest values. Individuals can choose any period they want, although Demark recommended using 14 days.
The values that a grader gets must be used to find the average value. And the DeMarker indicator formula is as follows:
DM = SMA(DMmax) / SMA(DMmax) + SMA(DMmin)
Your best bet is to calculate all those mentioned highest highs and lowest lows and then use the DeM formula.
DeMarker Trading Strategy
You may consider using the services of a broker or try using a strategy which relies on DeMarker indicator and other technical and fundamental analysis tools. It takes experience and skills, but you can get great profit if you learn how to use the DeM indicator.
The DeM indicator consists of a single fluctuating curve. It isn’t based on the usage of smoothed data. The default period recommended by the developer of the indicator is 14 periods. Increasing the number of periods means that the indicator curve will keep becoming smoother. Similarly, it can become more responsive if traders choose smaller periods.
The DeM indicator is bounded between values 0 to 1 and has a base value of 0.5. However, some variants of DeM suggest using a 100 to -100 scale. The indicator is lined at both 0.30 and 0.70 values to use as a stop-loss or warning signal. If the price crosses these lines, a price turn is imminent.
If a value crosses any of these borders, it means the asset is becoming more volatile. If the asset is within the borders, it means low risk.
Typically, traders interpret values above 0.60 as ones that are indicative of lower volatility and risk. Values below 0.40 are interpreted as a sign of increased risk. If the curve crosses over any of these boundaries, it could be the risk of overbought or oversold conditions. Traders should consider investing when the values are within 0.30 and 0.70.
Levels below 0.3 indicate that the asset is oversold. If the levels are above 0.70, then the trader should interpret it as overbought.
Note: keep an eye on the DeM indicator on trending markets. The indicator is not suitable for ranging markets are not suitable. When trying to build a strategy by using the DeM indicator, make sure to choose the period that works for you.Yes, I want access to free training