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.