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How to Use the DeMarker Indicator

The DeMarker indicator, better known as DeM, is a technical indicator that measures the demand for the underlying asset. It was named after a prominent technical analyst Thomas DeMark who created the indicator. 

In this blog post, we will provide you with all the necessary information on the DeMarker indicator, how to identify potential changes in the trend direction, and share tips on how to incorporate the DeMarker indicator in your daily trading routine.

Applying the DeMarker indicator into the MetaTrader5 (MT5) trading platform is quite easy. Simply choose the indicator from the drop-down menu under indicators > Oscillators > DeMarker.

 

DeMarker Indicator on MT4

What It Looks Like

DeM compares the most recent maximum and minimum prices to the previous period's equivalent price. In essence, the indicator generates values to help you identify the directional bias of the market, and potential changes in the trend direction. Unlike some other oscillators, DeMarker consists of a single fluctuating curve.

As it belongs to the family of oscillators, DeMarker generates values from 0 to 1, although some variants of the indicator have a 100 and -100 scale. In the standard setting, values closer to 0 show an extreme oversold condition while readings closer to 1 read extreme overbought market conditions.

 

In this setting, which is a default setting on MT4, the base value is 0.5, while the default time span for the calculation of values is 14 periods.

The default setting has overbought and oversold lines set at 0.7 and 0.3 respectively. When the reading stays in between these two levels, DeM indicates that the market is likely trading sideways and implies lower volatility. 

On the other hand, trips above 0.7 and below 0.3 indicate a more trending market. The closer the value gets to 0 or 1, the higher the change of a price turn as the market is trading in an extreme environment. 

 

USD/JPY daily chart - How DeM works

 

DeM works in a similar fashion as the Relative Strength Index (RSI), the leading oscillator indicator. However, DeM focuses on intra-period maximum recorded highs and lows, rather than closing levels. 

DeMarker values are calculated by the following formula:

DEM = SMA(DeMMAX) [SMA(DeMMAX) + SMA(DeMMIN)], where:

DEM stands for DeMarker

  • DeMMAX - records the difference between the current high and previous high over the number of X periods
  • DeMMIN - records the difference between the current low and previous low over the number of X periods

 

You may want to try trading using the MetaTrader 5 platform to get more familiar with the DeMarker indicator and how it’s best used, before you can start using its signals in your daily trading routine.

Strengths and Weaknesses of This Indicator The main advantage of the DeM indicator is its reliability. DeMarker is probably less prone to distortions, compared to some other movement indicators. The indicator’s most important use case is informing the trader of an imminent change in the price direction, and hence offering a chance to capitalize on probable imminent price trends.

Moreover, DeM is used by traders to identify market tops and bottoms, assess the volatility and associated risk, and most importantly, to inform us when the market trades in the overbought and oversold market conditions. 

On the other hand, DeMarker shares the same weakness with other oscillators. Despite the fact that its readings are showing an overbought or oversold market, these readings can always get to more extreme levels. 

For instance, if USD/JPY trades in an uptrend and DeM current value is 0.75, it signals that the market is overbought and a change in the trend direction is likely. However, USD/JPY may gain additional 200 pips and push DeM into 0.9, for instance, before starting to reverse

Thus, signals from DeMarker are not enough to predict a reversal. For this reason, it is often used in combination with other technical indicators.
How to Use DeMarker in Trading

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. 

 

Trading the DeM indicator - USD/JPY

 

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. 

Summary

The DeMarker indicator, or DeM, is a technical tool deployed by traders to measure the demand for the underlying asset. As an oscillator, it generates values from 0 to 1, where value of 0.7 or higher shows an overbought market while readings of 0.3 or below signal that the market is oversold and change in the price direction is imminent.

DeM is designed to compare the most recent maximum and minimum prices to the previous period's equivalent price. This way, DeMarker helps you identify the directional bias of the market and potential changes in the trend direction. As other technical indicators, it is best used in combination with other tools.

 

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