The DeMarker indicator, also known simply as DeM, is a technical analysis oscillator devised by Tom DeMark. It is a common sight on many trading platforms.
It looks to confirm the underlying direction or trend of the market and to anticipate likely price trend reversals. It is known as an oscillator as the values fluctuate between fixed points on a scale.
Oscillators were developed to try to filter out fake moves in a market. In strong trends they will follow the same pattern as the price, but towards the end of a trend the oscillators will fail to confirm the movement.
Divergences in the movement of the indicator and the price itself can be used to pick the top or bottom of a market. They can therefore help traders decide when to enter a market and when to buy or sell an asset.
The DeMarker indicator can be used as part of a trading strategy in a variety of markets, especially equities and forex.
As with any technical analysis tool, the DeMarker indicator uses pricing behaviour in the past to forecast future behaviour. It compares the maximum and minimum prices in the current time period with those achieved in the previous period.
It is a single line that oscillates between limits of 0 and 1 and has a base level of 0.5. There is also a version that uses the same formula but moves between limits of -100 and +100.
You can set your own timescale using units of 1 minute, hour or day. The standard timescale used for calculation is 14 days. A shorter timescale will make the indicator more sensitive and is better for spotting entry and exit points but it will also increase choppiness and make false signals more likely.
A longer timescale will smooth out the DeM indicator, making entry and exit signals less obvious but is good for confirming trends.
Overbought and oversold levels
The overbought level – which signifies that a downturn in price could be on the way and a sale should be considered - is usually set at 0.7.
The oversold level – which indicates that a price increase could be on the way and a purchase considered – is usually set at 0.3.
These levels can be altered to suit. For a longer-period setting, where the oscillations will be shallower, it may be better to set them at 0.6 and 0.4, for example.
The above diagram shows the Apple share price from 4 January 2018 to 12 April 2018, with the price movements in candlesticks on the top chart and the DeM values calculated for H4 timeframe with period value 13 on the bottom chart. The DeM chart has the overbought and oversold levels set to the default values of 0.7 and 0.3.
If the price is on an upward trend and the DeM value is also rising, the trend is expected to continue. This can be seen on the chart in February when both the DeM value and the share price are moving upwards.
The DeM line passing through the overbought line should be seen as a warning that the uptrend may be running out of steam and that a reversal could be on the way.
An uptrend coupled with a falling DeM value indicates that the uptrend is losing momentum and may suffer a reversal.
Similarly, in a downtrend if the DeM value is also falling then the trend is expected to carry on, while if the DeM is rising, the end of the trend may be in sight and a price reversal may be on the way.
For instance, the DeM value passes the 0.3 oversold line on the chart in January and levels out before the Apple share price starts an upturn.
Things to note
The DeMarker indicator is a good way of spotting trends and of being made aware of possible buy and sell points in a ranging market.
Due to the way the indicator is calculated a DeMarker strategy is better at spotting buy points in an uptrend than sell points in a downtrend.
In a strongly trending market it may stay in the overbought and oversold zones for some time, greatly reducing its usefulness.
So, while useful on its own, like any technical indicator, the DeMarker indicator is better combined with other indicators to confirm its signals.