Last Monday we presented the DeMarker indicator. It is an indicator that - similar to the RSI (Relative Strength Index) - measures the strength of a trend. Since it belongs to the class of oscillators, it also has its weaknesses: on a short-term basis, it can rise or fall strongly, even though only a sideways phase takes place.
Analysts are also aware of the fact that the indicator gives better signals delivers when you analyze market highs. This is due to the fact that there are statistically generally more values that are close to the highs than the other way around. More detailed explanations on the calculation of the indicator can be found in the associated article.
We want to use the knowledge in our trading system. Therefore, we still need an indicator that acts as a filter for strong trend phases and by means of which we can distinguish whether it is only a sideways phase within a trend or whether the correction is larger. For this we use the volume indicator On-Balance-Volume , also called OBV indicator.
Structure of the trading system with the DeMarker indicator
We want the trading system on the 30- Apply minute chart. To do this, we take the Dow Jones Index and set up the following rules for our trading:
A call / put option (term 15 minutes) is bought if...
- the DeMarker indicator is between 0.3-0.7 or there is a divergence.
- if the OBV indicator clearly shows up / down.
- if there is a relevant resistance / Support was broken.
We have divided the course of the price into six possible trades and now want to analyze how well our trading system was able to select the positive trades from the bad ones.
- In the first case we see a strong downward trend, but a bottom seemed to be forming. Our first rule, according to which the DeMarker indicator should be in a range between 0.3-0.7, was fulfilled. The third rule that an important resistance must be broken (red downward trend line) was also fulfilled. However, the volume did not really want to play along: the OBV indicator remained at low values, so no trade was concluded.
- In the second case, we see a clear divergence: Rule No. 1 is fulfilled; the OBV indicator is also pointing down and the flag (red) was a support that was broken down. Therefore, the trade was made downwards and was successful.
- In the third case, we have two rules that were not met. There was a divergence, but the OBV was relatively strong. In addition, there was no break in support and therefore no trade.
- We had a resistance that had previously been broken up, a sharply rising OBV and after one short nightcap also a rising DeMarker indicator. Admittedly, this trade was tricky and required a lot of flexibility, because for a short time it looked as if a divergence was developing. Against this, however, the OBV indicator spoke again. A downward trade was therefore out of the question, but an upward trade was entirely conceivable.
- Here, too, the OBV indicator was helpful. During the sideways phase, the weakness of the DeMarker indicator becomes clear: it fluctuates sharply downwards and then comes back again, while the OBV indicator initially remains at one level. However, when support is broken down, all three rules including falling OBV and DeMarker are met. A 15-minute put option made a decent profit here.
- We only included the sixth case to make it clear once again that sideways phases for the DeMarker indicator cannot be interpreted. In this case, it falls, while the OBV indicator shows only slight fluctuations. However, it is currently becoming interesting because the OBV indicator is pointing down sharply and support has been broken down. However, the DeMarker indicator is already in an oversold area. If he continues to remain in this area or if there is no divergence, a trade towards the put could be successful.
Conclusion: An oscillator is often not enough
Although the DeMarker indicator is very popular, it has its weaknesses especially in the short-term area. A confirmation by the volume in the form of the OBV indicator is therefore very useful. A look at the period (five days) that we analyzed above shows: With the rules set up, two clear trades would have been successful - one somewhat tricky or not - and in two cases there would have been no trading.