DeMarker – A good tool for market trends analysis
DeMarker indicator (DI) is a technical indicator (specifically an oscillator) created by Tom Demark and it is used to analyze the trend of the price of an instrument such as a currency pair (Forex) in the market. It can also be used to study the trends of other instruments such as stocks and commodities for example. It is an oscillator created to identify new buying and selling opportunities. In some way, is similar to the Directional Movement Indicators developed by Welles Wilder. In general, Demark goal was to create an indicator that overcome the problems normally associated with other technical indicators and tools used to identify overbought and oversold trading conditions in the market. This indicator tracks the market sentiment of an asset by comparing the asset’s present price with the price of the previous period. The basic concept behind the DI is that it can be used to detect changing market interest in an asset and by doing so identify market highs and lows.
Demark designed this forecasting method to predict the beginning of a trend in the medium and long term, and is based on specially designed coefficients.
Basically, DeMarker Technical Indicator is based on the comparison of the maximum of a period with the maximum of the previuos period. If the current maximum is higher, the resulting difference will be taken into account (it will be registered) in the calculation of the indicator. If the current maximum value is less or equal than the maximum of the previous period (the difference between both values is 0 or negative), a 0 is registered. After obtaining the differences for the different periods studied, these values will be added. The final value obtained will be used as the numerator of DeMark indicator and is divided by the same value plus the sum of the differences between the current minimum price and the minimum of the previous period. If the current minimum price is lower than the previous low price, the difference between both values is recorded for calculating the indicator. Otherwise, a 0 is registered.
In this way, the differences between maximum and the differences between minimum are designated as follows:
Therefore, the formula for calculating this oscillator is the following
Demark investigation concluded that an indicator designed in such a way could anticipate major price events such as reversals, bottoms and tops in contrast to many other tools that are just followers.
However, we must consider the time frame in which the analysis is done. For example, if we use long time periods when calculating the indicator, we can use it to observe and study the market in the long-term trend, and if we use short periods, this indicator can be very useful to find points to enter the market with a lower risk, and plan the time of the transaction to get in the market with the prevailing trend.
The DeMarker Indicator has developed a very good reputation for being able to accurately and consistently detect new trading opportunities for almost all types of trading markets.
One of the main advantages of the DeMarker indicator is that it also possesses the ability to distinguish between breakouts and fakeouts very well enabling it to identify new trading channels much better than other technical tools. In fact, the DeMarker oscillator has developed an impressive track record in detecting true price reversals. The DI is not only capable of producing these types of trading signals on the longer time frames of daily basis to above, but it can also do so during intraday trading.
In addition, the DeMarker indicator is particularly good at identifying when a trend is reaching their end as well as recommending good entry and exit points on a daily basis.
The reliability of the Demarker Indicator has tempted many traders to solely use it to help them identify major trading opportunities and to take trading decisions such as selecting precise entry and exit points.
Interpretation of DeMarker Indicator
The DeMarker indicator oscillates with a range between -100 to 100 and makes no attempt to filter its raw data (it considers all data) and its interpretation is very simple. If the value of the indicator is less than 30 we should expect a bullish trend reversal, but when the indicator is above 70 we should expect the opposite, a bearish trend reversal. In addition to detecting changes in market trends, Demark can be used to identify entry and exit points.
There are, in fact, two variants of the DeMarker indicator with one operating between -100 and 100 whilst the second has a range between 0 and 1. Both variants are calculated using the same formula.
With the 0 to 1 DeMarker indicator, the values recorded above 0.7 are highly indicative that a bear reversal or retraction is imminent whereas the values of 0.3 and below indicate that the price trend will change to bullish. Also, the range between 0.3 and 0.7 suggest a market with no clear trend (flat-lining market).
Consequently, this information can be used to identify easily and accurately good entry and exit points for buying and selling opportunities.