DeMarker

The DeMarker Indicator, developed by trader Thomas R. DeMark, is a tool used to identify potential price extremes in the market. It helps traders determine when an asset might be overbought or oversold, signaling possible trend reversals. Originally designed for commodity markets, the DeMarker Indicator is now widely used in stocks, forex, and other trading assets.

Traders use the DeMarker Indicator to gauge the strength of price movements and identify potential turning points. By analyzing the rate of price changes, the indicator helps in spotting overbought or oversold conditions. This can be particularly useful for active traders looking to enter or exit positions at optimal times.

How the DeMarker Indicator Works

The DeMarker Indicator compares the current period's high and low prices with those of the previous period. It calculates two separate values: DeMax and DeMin.

• DeMax: measures the increase in price from one period to the next.

• DeMin: measures the decrease in price from one period to the next.

These values are then averaged over a set number of periods to produce the DeMarker value, which ranges between 0 and 1 (or 0 to 100%). Values above 0.7 (70%) indicate overbought conditions, while values below 0.3 (30%) suggest oversold conditions.

Reading the DeMarker Indicator

The DeMarker Indicator is displayed as a line oscillating between 0 and 100. Here's how to interpret it:

• Above 70: the asset may be overbought, suggesting a potential price decline.

• Below 30: the asset may be oversold, indicating a possible price increase.

• Around 50: indicates a neutral market with no clear trend.

Using the DeMarker Indicator in Trading

Traders use the DeMarker Indicator to identify buy and sell signals based on its readings:

• Buy Signal. When the DeMarker line moves from below 30 to above 30, it may indicate that the asset is recovering from an oversold condition.

• Sell Signal. When the DeMarker line moves from above 70 to below 70, it may suggest that the asset is retracting from an overbought state.

Additionally, divergences between the DeMarker Indicator and price movements can signal potential trend reversals. For example, if the price reaches a new high but the DeMarker does not, it could indicate weakening momentum and a possible downturn.

Exercise

Objective: Use the DeMarker Indicator to identify potential buy and sell signals on a real asset.

Scenario: Trading EUR/USD on a 4-Hour Chart

1. Set Up the Indicator:

   • Open your trading platform and select the 4-hour chart for the EUR/USD currency pair.

   • Add the DeMarker Indicator with a 14-period setting.

2. Identify a Buy Signal:

   • Watch for the DeMarker line to drop below 30, indicating oversold conditions.

   • Then, observe as the DeMarker line rises above 30, suggesting a potential price increase.

   • If these conditions are met, consider entering a long position.

3. Identify a Sell Signal:

   • Look for the DeMarker line to rise above 70, indicating overbought conditions.

   • Then, see the DeMarker line drop below 70, suggesting a potential price decline.

   • If these conditions occur, consider entering a short position.

4. Review Your Trades:

   • Track your buy and sell decisions based on DeMarker signals.

Remember to note how often these signals lead to successful trades and adjust your strategy as needed.