The DeMarker indicator is rather unknown to beginners. Developed by the technical analyst Thomas DeMark, who introduced the indicator in his book "Science of Technical Analysis", it is particularly popular in automated trading systems and is also very popular in the forex sector, among others.
The indicator - similar to the RSI (Relative Strength Indicator) - measures the strength of the trend and can then indicate when the market is exhausted or when it could turn around in the prevailing trend. The DeMarker indicator therefore belongs to the class of oscillators.
How is the DeMarker indicator calculated?
The calculation of the DeMarker indicator is not very complicated. In words, the indicator compares the price action of the previous period to the current period and forms an average price, which shows the strength of the trend. As usual for oscillators, overbought and oversold markets are identified.
The formula is established using the following calculations:
- First, a time interval is defined (this is usually the value 14).
- Determining the maximum price DeMax = (current high) - (high of the previous period); if the value is less than 0, the value 0 is always set.
- Determination of the lowest price DeMin = (current low) - (low of the previous period); here too, the value 0 is always selected if the real value is below 0.
- DeMarker indicator = moving average of DeMax / moving average of DeMax + moving average of DeMin
The interpretation of the DeMarker indicator
As the formula clearly shows, the DeMarker indicator also makes use of moving averages. The ratio of price action in the form of moving averages is then displayed as a line oscillating around areas 0 and 1. However, there are also values between -100 and 100. However, the statement remains the same.
- The area above 0.7 indicates an overbought situation.
- The area below 0.3 indicates an oversold situation.
The value of the indicator increases as soon as the DeMax value also increases. However, since there are usually more DeMax values than DeMin values, analysts place more emphasis on the indicator's statement at market highs than at lows.
A common analysis of the indicator is the identification of price divergences. If the price continues to rise while the DeMarker indicator is already falling, this is an indication of short to medium-term trend reversals, especially when highs are reached. The following chart of the S&P 500 Index Futures shows this very clearly.
Especially in overbought areas, price divergences could have been good indicators of trend reversals, while turns from bottom to top were too dynamic to form a price divergence. The indicator nevertheless indicated an oversold zone.
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Oscillators have proven themselves in combination
Like most oscillator indicators, the DeMarker indicator has also been used in conjunction with other indicators or technical setups proven. For example, a position could be opened if...
- the DeMarker indicator is in the overbought area,
- there is a price divergence,
- the upward trend has been broken
- and a volume indicator shows a downward trend.
In the next article on strategies we will present a trading system with the DeMarker indicator. In the meantime, trading can also be carried out on the basis of technical indicators via the broker BDSwiss. The broker is one of the longest established brokers in Cyprus and offers several services for its customers.
Here you will find information on the
- DeMarker indicator
- Short-term trading with DeMarker indicator
- indicators as trading systems.