Tired of making wild guesses in the Forex market and leaving your trades to the whims of fate? Fear not, for the DeMarker Indicator (DeM) is here to save the day. This technical analysis tool will help you navigate the ups and downs of the Forex market with precision and flair. Just think of DeM as your trusty sidekick, guiding you through the market’s twists and turns, leaving you with more profits and more smiles. So, strap on your seat belts and let the DeM be your guide on this wild Forex ride!
Forex Trading with DeMarker Indicator (DeM): Highlights 1. Identifies market momentum: DeMarker Indicator measures the market's strength and momentum, which can help traders identify potential trend reversals. 2. Overbought/Oversold signals: DeM provides signals for overbought and oversold conditions in the market, which can be used to make buy or sell decisions. 3. Confirms trade decisions: DeM can be used in conjunction with other technical indicators to confirm trade decisions and increase the accuracy of predictions. 4. Sets stop-loss and take-profit levels: DeM readings can be used to set stop-loss and take-profit levels, helping traders minimize their risk and maximize their potential profits. 5. Simple to interpret: The DeMarker Indicator is easy to interpret and can be quickly applied to chart analysis, making it accessible to traders of all experience levels.
The DeMarker Indicator (DeM) is like a mood swing detector for the Forex market! It measures how euphoric or depressed the market is, by comparing the highs and lows. But beware, just like human moods, the Forex market can change in an instant. In this article, you will learn everything you need to know about the DeMarker indicator (DeM), how it is calculated, and how you can plot it on your charts and maximize your trading profits.
What Is the DeMarker Indicator?
The DeMarker Indicator, also known as DeM, is a technical analysis tool used in forex trading to measure market momentum and identify potential overbought and oversold conditions. Developed by the technical analyst Thomas DeMark, the DeMarker Indicator (DeM) is a type of oscillator that calculates its values by comparing the highest and lowest prices achieved in the current time period to those in the previous period.
The DeMarker Indicator is considered an oscillator due to its fluctuating curve that ranges between 0 and 1. However, some versions of the indicator use a scale of 100 and 0, or 100 versus -100. The indicator often has warning signals set at the 0.30 and 0.70 values, with values outside these levels being seen as riskier and those falling within low risk. The indicator signals overbought and oversold conditions when the curve crosses these boundary lines.
The DeMarker Indicator operates similarly to the commonly used Relative Strength Index (RSI) oscillator, but it concentrates on the highs and lows within a period, instead of closing levels.
There are several ways to build a trading strategy using the DeMarker Indicator, which is considered a leading indicator because of its formula’s relationship with market prices. Unlike the popular Relative Strength Index, the DeMarker Indicator does not rely on closing price points and instead examines the entire trading period for highs or lows, reducing the potential for chaos that can distort other indicators. As the indicator oscillates between its extremes, it shows the changing tides of buying and selling pressures.
Keep in mind that the DeMarker Indicator, like any technical indicator, is not 100% accurate, and false signals may occur. However, it provides consistent enough signals to give a forex trader an edge, but it takes time to develop the skill to interpret its signals correctly. To get the most out of this tool, it's recommended to complement it with another indicator for further confirmation of potential trend changes.
How to Read DeMarker Indicator?
The DeMarker Indicator (DeM) is a momentum oscillator that measures market strength by comparing the most recent highest high to the current price. The values generated by the DeM range from 0 to 1 and are used to indicate overbought and oversold conditions in the market.
Here’s how to read the DeMarker Indicator:
Overbought conditions: When the DeM value rises above 0.7, it signals that the market is overbought, and a potential price reversal is imminent. This suggests that it’s a good time to sell or take profits.
Oversold conditions: When the DeM value drops below 0.3, it signals that the market is oversold, and a potential price reversal is imminent. This suggests that it’s a good time to buy.
Neutral conditions: When the DeM value is between 0.3 and 0.7, it signals that the market is neutral, and there is no clear direction of the trend.
Technical indicators all predict future prices based on past market behavior. No indicator is perfect, but using the DeMarker in combination with others can provide an advantage, contributing to successful trading. It’s also worth mentioning that false signals can happen, and it takes practice to master the interpretation of DeM signals accurately.
Importance of market momentum in Forex trading: Market momentum in Forex trading is crucial as it helps traders determine the direction and strength of a trend, identify potential trend reversals, manage risk, and confirm trends. Momentum indicators such as the DeMarker Indicator or the RSI can provide signals for traders to enter or exit trades. Understanding and utilizing market momentum can improve a trader's chances of making profitable trades in the Forex market.
Remember that learning how to read forex charts is a core skill for traders to make informed investment decisions. This skill is a must in helping to develop solid strategies that are tailored to manage financial goals.
How is the DeMarker Indicator (DeM) Calculated?
The calculation of the DeMarker Indicator, created by Thomas DeMark, involves four steps that may seem complicated but it can be done automatically by computer software such as the MetaTrader4 platform.
The DeMarker Indicator calculation involves four steps. The process compares the current high and low values with the previous high and low values over a set number of periods (usually 14 bars) to determine the DeMMAX and DeMMIN values.
To calculate DEMMAX, the high of each bar over a set number of periods (N) is compared to the previous high. If the current high is lower than the previous high, a value of 0 is recorded. If the current high is greater than the previous high, the difference between the two is recorded as the value. The numerator is then calculated by taking the simple moving average of these recorded values over the period N.
Calculate DeMax = High – Previous High if >0, otherwise DeMax = 0.
DeMMIN is calculated by comparing each bar’s low to the previous bar’s low over the specified number of periods ‘N’. If the current low is higher than the previous low, a value of 0 is recorded. If the current low is lower than the previous low, the difference between the two is recorded as the value. The DeMMIN values are then averaged over the period ‘N’ using a simple moving average to give the denominator.
Calculate DeMin = Previous Low – Low if >0, otherwise DeMin = 0.
The formula for the DeMarker indicator:
DEM = SMA(DeMMAX)/[SMA(DeMMAX) + SMA(DeMMIN)]
The DeMarker indicator formula produces values ranging from 0 to 1. If the result is above 0.7, it is considered overbought, and if it is below 0.3, it is considered oversold.
The Bollinger Bands in blue can offer additional insights. They show two standard deviations from a center line, which is usually a 20-period simple moving average. This indicator is used to measure price changes based on volatility. The red exponential moving average displays changes in price values from another angle. Notice how the red line predicts price reversals before the Bollinger center line. This happens when the red line crosses the blue Bollinger moving average. Observe how the candlesticks move around the red line and then cross it, signaling a sudden reversal. If you check the DeM after each moving average crossover, you'll see that the DeM has already shifted into the trending direction, making it a leading, not lagging, indicator.
How to Use DeMarker Indicator in MetaTrader 4?
To use the DeMarker Indicator in MetaTrader 4, follow these steps:
- Open the MetaTrader 4 platform and navigate to the “Insert” menu.
- Select “Indicators” and then “Oscillators.”
- Scroll down to find “DeMarker” and click on it.
- A new window will appear where you can set the “Period” (default 14) and other parameters.
- Click “OK” to apply the indicator to your chart.
You can now use the DeMarker Indicator to help make trading decisions. The indicator will show up on your chart and you can use it to identify overbought and oversold conditions.
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Parameters and Control
The DeMarker indicator line is displayed in a secondary window beneath the price chart. Its values range from 0 to 1 (or 0-100%) with critical levels set at 30 and 70, although some traders use 20 and 80 for highly volatile assets like gold, silver, and oil.
A drop in the indicator line below 30 suggests the market is oversold, signaling a potential price increase. Conversely, if the line rises above 70, the market is considered overbought, signaling a potential price decrease. The only adjustable parameter in the DeMarker indicator is the averaging period or the number of bars used in the calculation. The color scheme is also adjustable, but it doesn’t impact the indicator’s performance.
The shorter the calculation period, the greater the sensitivity but the less reliable the signals. On the other hand, a higher averaging parameter shows a broader market trend but results in delayed trade signals. Changing the parameter of the indicator can have a profound effect on the way the market is perceived.
How to Use the DeMarker Indicator (DeM) in Forex Trading?
The DeMarker indicator can assist forex traders in determining the best time to enter or exit the market. When a trend has started, the DeM will rapidly change and then stabilize. If it breaks out of this stable state, it’s worth paying attention to.
Here’s an example of how the DeMarker Indicator (DeM) can be used in Forex trading:
- Load a currency chart for the pair you want to trade (e.g., EUR/USD).
- Plot the DeMarker Indicator on the chart.
- Observe the value of the DeMarker Indicator. If it’s above 0.7, the market may be overbought, indicating a potential sell signal. If it’s below 0.3, the market may be oversold, indicating a potential buy signal.
- Look for divergences between the DeMarker Indicator and price to confirm the potential trade signal. For example, if the DeMarker Indicator is overbought, but the price continues to make new highs, this is a bullish divergence and a potential buy signal.
- Place your trade accordingly (e.g., sell if overbought or buy if oversold) and set a stop loss to minimize potential losses.
- Monitor the trade and exit when appropriate (e.g., when the DeMarker Indicator reaches the opposite extreme or when another technical signal indicates it’s time to exit).
It’s recommended to use a trend-following indicator like a moving average to validate the DeM signal, avoiding incorrect reactions. By using the DeMarker in combination with other technical indicators, traders can increase their chances of successfully identifying profitable trading opportunities.
Trading signals of the DeMarker Indicator
The DeMarker indicator provides trade signals in technical analysis by measuring the strength of a financial instrument’s price trend. Here are the main trading signals generated by the DeMarker indicator:
- Overbought: When the DeMarker line rises above 0.7, it suggests that the price of the financial instrument has risen too fast and is overbought, indicating that a correction or a bearish trend reversal is likely to occur.
- Oversold: When the DeMarker line falls below 0.3, it suggests that the price of the financial instrument has fallen too fast and is oversold, indicating that a recovery or a bullish trend reversal is likely to occur.
- Buy signal: A bullish crossover of the DeMarker line from below 0.3 to above suggests a potential buy opportunity. This occurs when the DeMarker line moves from oversold territory to neutral or overbought territory, indicating that momentum has shifted from bearish to bullish.
- Sell signal: A bearish crossover of the DeMarker line from above 0.7 to below suggests a potential sell opportunity. This occurs when the DeMarker line moves from overbought territory to neutral or oversold territory, indicating that momentum has shifted from bullish to bearish.
It’s important to note that these signals should not be used as the sole basis for a trading decision. Other technical analysis tools, market conditions, and risk management strategies should be considered before making a trade.
DeMarker Indicator Strategy
The DeMarker strategy focuses on finding price reversals within established trends.
- Overbought and oversold levels indicated by the indicator are not necessarily reversal signals. They only indicate unusually high or low prices compared to the historical data. Overbought signifies strong buying pressure, while oversold signifies strong selling pressure.
- To use these indicators effectively, traders must observe the duration of time the market spends in these regions to determine if the market is ranging, in a mild or strong trend.
- If a market stays in extremely overbought territory for an extended period, it confirms an uptrend. A moderate overbought level (above 0.5 but below 0.7) indicates a modest uptrend. Traders should exercise caution when the DeMarker oscillator stays in overbought or oversold territory and aim to buy in price dips during an uptrend or sell in price spikes during a downtrend.
Traders can find trading opportunities by monitoring the DeMarker indicator moving out of overbought or oversold regions. Take a look at the trading chart below:
- The 14-day Simple Moving Average (SMA), indicated by the green dotted line on the chart, helps track the overall trend, with the price below it indicating a downtrend and above an uptrend.
- The orange vertical lines on the chart show instances where the DeMarker has exited oversold or overbought regions. Traders can consider buying if the indicator rises above 0.3 while keeping the 0.5 level as a target entry point. However, it is crucial to act quickly and take profits as these reversals are temporary. The next point where the indicator exceeds 0.6 can be used as a target level.
While this type of trading strategy can produce daily returns of 50 and 40 pips, it is important to remember that no trading system is profitable all the time. The goal for forex traders is to maintain consistency and attain positive net gains through the use of DeMarker Technical Analysis combined with other indicators.
Best Indicator Combinations for DeMarker indicator
There is no single “best” indicator combination for the DeMarker indicator, as different traders may prefer different methods for confirming trends and generating signals. Some common combinations include:
- DeMarker + Moving Averages: Moving Averages provide a clear view of the overall trend, and the DeMarker indicator helps to detect overbought/oversold levels within that trend. When the DeMarker rises above 0.7 (overbought) or falls below 0.3 (oversold), traders may look to confirm the signal with a Moving Average crossover or a change in the slope of the MA.
- DeMarker + RSI: The RSI is another momentum indicator that can help confirm trend strength and reversal signals generated by the DeMarker. A DeMarker crossover at overbought/oversold levels, combined with an RSI crossover or a change in RSI slope, can provide a strong confirmation of a reversal.
- DeMarker + Bollinger Bands: Bollinger Bands are a volatility indicator that can help traders gauge price deviation from the mean. When the DeMarker reaches overbought/oversold levels, traders may look for the price to return to the mean, as indicated by a Bollinger Band squeeze or price touching the upper/lower band.
- DeMarker + MACD: The MACD is a trend-following indicator that uses moving averages to detect changes in momentum. When the DeMarker reaches overbought/oversold levels, traders may look for a MACD crossover or a change in the MACD histogram slope as confirmation of a reversal.
Naturally, the wider the selection available to you, the better choice of indicator you can make. However, one should make sure to be due diligent and to practice one’s strategies in a demo account in order to get a better sense of the trading approach without risking the capital in a real account.
Forex Trading with DeMarker Indicator (DeM) – FAQ
What is the DeMarker Indicator in forex trading?
The DeMarker Indicator identifies overbought and oversold market conditions in technical analysis. By comparing current prices with highs and lows from a defined look-back period, it measures buying and selling pressures. Values above 0.7 indicate overbought conditions, while values below 0.3 indicate oversold conditions. Traders use the DeMarker Indicator to identify potential trend reversals and entry and exit points.
How do you trade with DeMarker Indicator?
An increase in price indicates an uptrend when it is above the line. The orange vertical lines indicate circumstances where the DeMarker indicator has shifted back from extremely oversold or overbought regions. Traders can consider buying the market as soon as the indicator exceeds 0.3, as long as they can enter below 0.5.
How accurate and reliable is DeMark indicator?
Across a wide range of instruments, DeMark Sequential signals have been found to be around 70% accurate in a recent independent back-test. It is essentially a risk-reward strategy, and its stop-loss positioning minimizes losses even when indicators occasionally underperform.
What is the best setting for the Demarker indicator?
The optimal setting for the Demarker indicator depends on the specific trading strategy and market conditions. A commonly used setting is 0.7 for overbought and 0.3 for oversold. However, it is best to experiment with different settings and find what works best for you.
What is the formula for the DeMarker indicator?
The formula for the DeMarker indicator is:
DeMarker = (Max Price High – Current Close) / (Max Price High – Min Price Low)
Where, Max Price High = Maximum price high for a specific time period (e.g., 14 days), Current Close = The current closing price and Min Price Low = Minimum price low for a specific time period (e.g., 14 days).
How do you read a DeMarker indicator?
There are usually lines drawn along the 0.30 and 0.70 values of the indicator, which indicate that a price turn is imminent. A value above or below either line implies a higher probability of an impending change in the current trend, whereas a value between the lines implies a lower probability.