DeMarker Indicator – What is it? How is it used?

The DeMarker indicator is a التحليل الفني tool that a trader will use to establish the demand of an underlying asset by comparing the asset’s most recent lowest and highest price to the previous periods equivalent price.

The tool is also used to identify high risk buying or selling areas or directional trend in a specific market, and to time market entry and exit points. It falls into the oscillator category of technical indicators.

A typical period for DeMarker analysis is two weeks. This is not to say it can’t be used with any other timeframe, it can. However, it will smooth out over longer intervals. 

Tom Demark Indicators

The DeMarker Indicator was developed by Tom Demark, a highly respected market mathematician, trader, and technical analyst. He is also the founder and CEO of DeMark Analytics. DeMark has developed several trend analysis tools over the years, that are widely used in الأسواق المالية to predict market trends and price movements.

DeMark has also shared many of his insights with the greater trading community in a series of books. Other indicators developed by DeMark include TD Sequential, TD Combo, TD Lines, TD Range Expansion Index, TD Differential, and TD Pressure.

Key characteristics of the DeMarker Indicator

The indicator plays a significant role in technical analysis for several reasons.

• It was designed as a leading indicator as it seeks to signal potential changes in price trend.
• Seeing that it is based on relative price data, it can be applied to any timeframe.
• It is often used in combination with other signals.
• The indicator is typically used to identify risk levels, price exhaustion, and market tops and bottoms.
• Unlike the Relative Strength Index (RSI), the DeMarker indicator doesn’t focus on closing levels, and instead looks at intra-period highs and lows.
• It is less susceptible to distortion.

How the DeMarker Indicator is implemented

The DeMarker indicator features a single fluctuating curve without using smoothed data. It is generally calculated over 14 periods.

However, increasing the number of periods smooths the curve, and decreasing the number makes it more responsive. This oscillator ranges from zero to one with a midpoint of 0.5, although some versions use a -100 to 100 scale.

Lines are typically drawn at 0.30 and 0.70 as indicators of possible price reversals. When values exceed these lines, it suggests a higher likelihood of a trend change, whereas values between the lines indicate a lower likelihood. When the curve crosses these boundary lines, it indicates potential overbought or oversold conditions.

Advantages and limitations

The DeMarker indicator exhibits features that may assist a trader in their technical analysis. However, the tool does come with limitations too.

Advantages:

• It’s a leading indicator so it may better help you anticipate market movements.
• It is a flexible tool in that it can be applied across multiple timeframes.
• Less prone to distortions in comparison to other technical analysis indicators.

Limitations:

• Better utilised in combination with other indicators to increase reliability.
• May generate false signals in choppy or sideway markets.
• The indicator generates a big volume of data making it a challenge to interpret, particularly for beginner traders who are not yet adept at التحليل الفني.
• Overdependence on this indicator can lead to overlooking other critical signals or neglecting important factors that impact price movements.

Calculating the DeMarker indicator

Identify DeMax and DeMin Values:

DeMax: This is calculated by comparing the current high to the previous high.

• If the current high is greater than the previous high, DeMax = current high – previous high.
• If the difference is negative, it uses zero in the calculation instead.

DeMin: This is calculated by comparing the current low to the previous low.

• If the current low is less than the previous low, DeMin = previous low – current low.
• If the difference is negative, it substitutes zero into the formula.

Calculate the DeMarker Indicator:

The DeMarker Indicator is calculated as the moving average of DeMax divided by the combined moving averages of DeMax and DeMin. Therefore, when the value of DeMax is higher relative to DeMin, the value of the DeMarker Indicator will be higher.

• When the indicator drops below 30, a bullish price reversal is anticipated.
• Conversely, when the indicator exceeds 70, a bearish price reversal is expected.

Using longer periods for calculating the indicator helps in identifying long-term market trends. Indicators based on shorter periods allow for market entry with minimal risk and enable timing transactions to align with the major trend.

Useful tips for using the DeMarker Indicator

• Use the DeMarker indicator together with other indicators for increased reliability, particularly in volatile or sideway markets.
• There is no one technical analysis tool that isn’t fallible, so exercise caution and practice sound risk management. 
• Consider practicing using the indicator in a demo trading account before applying it to live trading.

Why sign up for a demo trading account?

Regardless of whether you’re new to trading or someone that’s more experienced, a demo trading account is a great way to boost your understanding of the DeMarker Indicator, and technical analysis in general.

For one, the demo account mimics a live trading environment, i.e. it simulates real market conditions, allowing you to execute trades and assess outcomes.

The demo trading account is a fantastic way to learn how to apply technical analysis to trading strategies, using a variety of indicators, the DeMarker Indicator being one.

Seeing as a trader can use virtual funds to practice on a demo trading account, their own capital isn’t put at risk. This means the trader can increase their skills and expertise over time, until they have built up the confidence to start trading with real money.

The importance of technical analysis

Technical analysis is probably one of the most fundamental parts of trading, especially if you’re a scalper, day trade, swing trader, etc. Originating as far back as the 1800s, technical analysis has without doubt evolved significantly since then, and today includes hundreds of patterns and signals.

Technical analysts make use of several tools, which include a variety of indicators comprising of chart patterns, price trends, oscillators, moving averages, volume and momentum indicators and support and resistance levels.

While probably the most popular form of analysis, technical analysis does have some limitations. Some of the more common critiques are:

• History doesn’t precisely repeat itself so the study of price patterns may be less important than what is currently assumed.
• The interpretation of charts and patterns may be subjective, i.e. different analysts may interpret signals differently and thus come to opposing conclusions.
• That technical analysis does not always account for unforeseen events that may impact the market, and instead assumes that all relevant data is presented in the price. 
• Technical indicators can produce false signals, leading to poor trading decisions.
• While a large number of traders using the same technical analysis techniques can lead to predictable outcomes (self-fulfilling prophecy), it can also create herd behaviour, leading to increased volatility and unexpected market movements.

This means that proper risk management practices are incredibly important to safeguard your capital. Ensure you set stop-loss and take-profit orders.

Be mindful of the size of your trades, ensuring that they align with your budget and tolerance for risk. Ensure you conduct thorough technical analysis before making trading decisions to increase your potential for making gains. Trading is risky, and losses can occur completely out of left field. Ensure you’re taking the necessary steps to mitigate the unexpected.

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Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.