Tom DeMark has developed many useful indicators for day traders. Here, we talk about one of the most iconic: DeMarker indicator
Technical analysis is one of the two main types of studying and understanding the market. The other method is known as fundamental analysis. These are the two methods that Wall Street pros use to beat the market.
Fundamental analysis is a method that relies on news and economic data to determine the direction of an asset. Technical analysis, as we have written before, is a method that uses various indicators to determine the direction of an asset.
In this article, we will look at DeMarker indicator and how you can use it to beat the market.
What is the DeMarker Indicator?
The DeMarker indicator is a free indicator that is available in most charting software like MT4 and PPro8. The indicator is one of the 30+ indicators that were developed by Tom DeMark. Other indicators in the family are Differential, Channel 1, 2, and 3, Double Point, Camouflage, and Arc among others.
Tom is one of the best-known traders of our time, and his eponymous consulting firm is used by many Wall Street professionals.
The DeMarker indicator is found on the oscillators section of most trading platforms. It looks like other oscillators like the relative strength index and the commodity channels index.
The indicator is derived by comparing the maximum and minimum prices that have been achieved in a certain period with those achieved in another period. By making this comparison, the indicator attempts to assess the directional bias of the market.
As it is doing this, the indicator helps the users identify the oversold and overbought levels.
How to calculate it?
As we have written before, calculating how an indicator is calculated is not mandatory. We know many successful Wall Street traders who can’t explain how simple indicators like moving averages are calculated.
The DeMark indicator does not focus on closing levels as the RSI does. Instead, it focuses on intra-period highs and lows.
It looks at the current bar of the asset and compares it with the previous bar. If the strength of the high and low is less extreme in the previous bar, the indicator records a zero.
The indicator then looks at this range over a certain period. In most charts, the indicator uses a period of 14 but this can be changed.
How to Use the DeMarker Indicator
Using the DeMarker indicator is relatively easy.
First, you need to look at a chart that is trending. Like most other indicators, it is not recommended to use it in ranging markets.
Second, you need to check the period that has been applied. Looking at this period is important because it affects your trading strategy. You should test the period that works in line with the strategy.
Third, you need to apply the indicator and watch how it is behaving. A level below 0.3 is said to be oversold while a DeMarker above 0.70 is said to be overbought as shown below.
An overbought is usually a sign that the price may start coming down while an oversold level is usually a sign that the price may start moving upwards.
However, as you can see on the chart above, this is usually not the case all the time. A pair may continue declining even after the DeMarker indicator reaches the oversold level and vice versa.
This means that you should learn the indicator first and back test it for a while.
External Useful Resources
DeMarker indicator: an effective cure for risks or why you should trust the classics – Forextester
DM indicators ideas – Tradingview