In essence, the DeMarker is a contrarian technical indicator. As we outlined earlier, it works to identify overbought and oversold market conditions, pointing towards potential changes in the price direction.
Thus, we are now deploying the DeMarker indicator to identify potential price levels where a change in the price direction may occur soon. Here we have a USD/JPY daily chart that trades in a downtrend as the price action has been creating a series of the lower highs and lower lows.
As noted earlier, DeM is best used in combination with other technical indicators. For this reason, we have the Fibonacci extensions deployed to identify support levels where the sellers may hit an impasse, providing the buyers with an opportunity to drive the price action higher.
The blue arrow shows the moment the price action touches the 127.2% Fibonacci extension support, signaling that the buyers are likely to step in at this price level, and drive the price higher. In addition, the sellers are likely to exit their profitable trades at this point as well.
In the meantime, we see that DeMarker has a reading of 0.277, which shows that the market has entered an oversold territory. At this moment, we have a confluence of two bullish signals - market is oversold according to DeMarker, and the price action has approached the first Fibonacci extension support.
Hence, this strategy is based on deploying additional indicators, alongside DeMarker, to identify spots where the price action may start reversing.
Entry should be placed at the point where 127.2% is first touched, while stop-loss is located around 40-50 pips below this level to protect against whipsaw losses resulting from knee-jerk market reactions.
Take profit is set at the starting point of the Fibonacci extension i.e. where the big horizontal support is located. From this point, the market had started moving higher, before the bears erased all gains and pushed the price action below this important support level.
Our assumption is that the market will want to return to the “crime scene” and retest the same level, but now in the context of resistance. This is what eventually happens and our trade is finally closed. We managed to bank in around 200 pips, while risking 50 or pips or less. This is a great risk-reward ratio.
This example shows how to mix DeMarker with other technical tools. You may want to open a open a demo account, and start using this simple, but effective trading strategy.