The DeMarker indicator, commonly referred to as DeM, is a technical tool designed to assess the demand for a particular asset. Named after its creator, renowned technical analyst Thomas DeMark, the DeMarker indicator has become a staple for traders.
In this article, we’ll cover everything you need to know about the DeMarker indicator, including how to spot potential trend reversals and practical advice on integrating this tool into your daily trading practices.
Adding the DeMarker indicator to your MetaTrader5 (MT5) platform is straightforward. Navigate to the indicators section, select Oscillators, and then choose DeMarker from the list.
What is Demarker Indicator?
The DeMarker indicator, often abbreviated as “DeM” or referred to as the DeMark indicator, is a tool in technical analysis that evaluates the demand for an asset by comparing the latest high and low prices with those of the previous period. This comparison helps to gauge the market’s directional trend.
Part of the oscillator category of technical indicators, the DeMarker is rooted in the concepts introduced by the technical analyst Thomas DeMark.
How to Use Demarker Indicator?
Here’s a rephrased version of that content:
The DeMarker indicator (DeM) operates by comparing the most recent highs and lows with those of the prior period. This process helps to determine the market’s directional bias and spot potential trend reversals. Unlike other oscillators, DeMarker features a single fluctuating curve.
As part of the oscillator family, DeMarker produces values ranging from 0 to 1, although some versions of the indicator use a scale from 100 to -100. In its standard configuration, values approaching 0 indicate an extremely oversold condition, while values nearing 1 suggest an extremely overbought market.
In the default settings on the MT4 platform, the base value is 0.5, with the calculation period set to 14 intervals. The overbought and oversold thresholds are typically set at 0.7 and 0.3, respectively. When the DeM reading falls between these levels, it indicates that the market is likely in a sideways trend, with reduced volatility.
However, when the DeM value rises above 0.7 or drops below 0.3, it suggests a more trending market. The closer the value moves to 0 or 1, the higher the probability of a price reversal, as the market is in an extreme state.
The DeMarker operates similarly to the Relative Strength Index (RSI), a widely-used oscillator, but with a key difference: DeMarker focuses on intra-period highs and lows, rather than closing prices.
The DeMarker values are calculated using the following formula:
DEM = SMA(DeMMAX) [SMA(DeMMAX) + SMA(DeMMIN)], where:
Where:
– DEM stands for DeMarker
– DeMMAX measures the difference between the current high and the previous high over a specified number of periods
– DeMMIN measures the difference between the current low and the previous low over a specified number of periods
To gain a better understanding of how the DeMarker indicator functions and how to apply its signals to your trading strategy, consider experimenting with it on the MetaTrader 5 platform.
Strength And Weakness Of This Indicator
The DeMarker indicator (DeM) stands out for its reliability. Compared to other momentum indicators, DeMarker is likely less susceptible to distortions. One of its key benefits is its ability to signal an impending shift in price direction, providing traders with an opportunity to capitalize on potential upcoming trends.
Traders also utilize DeM to pinpoint market tops and bottoms, evaluate volatility and associated risks, and most importantly, identify when the market is in overbought or oversold conditions.
However, like other oscillators, DeMarker has its limitations. Even when it indicates that a market is overbought or oversold, these readings can reach even more extreme levels. For example, if USD/JPY is trending upward and the DeM value hits 0.75, it suggests that the market is overbought and a trend reversal may be on the horizon. However, USD/JPY could still climb an additional 200 pips, driving the DeM value to 0.9, before any reversal begins.
Therefore, while DeMarker provides valuable insights, its signals alone aren’t always sufficient to predict a reversal. For this reason, it is often paired with other technical indicators for a more comprehensive analysis.
Demarker Indicator Explained for Forex Trading
In essence, the DeMarker indicator functions as a contrarian tool in technical analysis. As mentioned earlier, it helps identify overbought and oversold conditions in the market, signalling potential shifts in price direction.
In this scenario, we’re using the DeMarker indicator to pinpoint potential price levels where a reversal might soon occur. Let’s examine a USD/JPY daily chart, which is currently in a downtrend, characterized by a pattern of lower highs and lower lows.
As previously noted, DeM is most effective when combined with other technical indicators. Therefore, we’ve incorporated Fibonacci extensions to identify key support levels where sellers might encounter resistance, potentially giving buyers a chance to drive the price higher.
The blue arrow indicates the point at which the price action touches the 127.2% Fibonacci extension support level, suggesting that buyers are likely to enter the market at this level, pushing the price upward. At the same time, sellers may begin to close their profitable positions.
Meanwhile, the DeMarker indicator shows a reading of 0.277, indicating that the market has entered oversold territory. This creates a confluence of two bullish signals: the market is oversold according to the DeMarker, and the price action has reached the first Fibonacci extension support level.
This strategy relies on using additional indicators, alongside the DeMarker, to identify potential reversal points in the price action.
An entry should be made when the price first touches the 127.2% Fibonacci extension level, with a stop-loss placed approximately 40-50 pips below this point to guard against sudden market reactions.
The take profit should be set at the origin of the Fibonacci extension, where the major horizontal support is located. This level had previously served as the starting point for a price rally before the bears pushed the market below this crucial support level.
The assumption here is that the market will revisit this “crime scene” to test it again, but this time at a resistance level. This scenario eventually plays out, and the trade is successfully closed. We managed to secure approximately 200 pips while risking 50 pips or less, resulting in an excellent risk-reward ratio.
Conclusion
The DeMarker indicator, commonly known as DeM, is a technical tool used by traders to gauge the demand for an underlying asset. As an oscillator, it produces values ranging from 0 to 1. Readings of 0.7 or above indicate an overbought market, while values at or below 0.3 suggest the market is oversold and a price reversal may be on the horizon.