Demark Oscillator

 

Demark oscillator review

Demark indicator (fig. 1), more often called DeMarker, was developed by Thomas R. Demark, an outstanding trading theorist and practitioner, and described in his book «The New Science of Technical Analysis».

Demark oscillator review

Fig. 1

Demark’s goal was to create an indicator of overbought and oversold demand dynamics, which would also show the risk of buying and selling. At the same time, the new Forex indicator should have had no typical disadvantages of tools of the same direction. Demark indicator shows a possible trend change when the price approaches the extrema and is based on the principle of comparing the maximum for a certain period with the maximum of the previous period.

DeMarker formula is quite complex and contains several actions. First, the DeMax i maximum index is calculated, which shows how much the current maximum is higher than the previous one by the formula: if HIGH i > HIGH i — 1, то DeMax i = HIGH i — HIGH i — 1, otherwise DeMax i = 0, where:

  • HIGH i — the maximal price of the current bar;
  • HIGH i — 1 — the maximal price of the previous bar.

Then the indicator of minimums shall be defined DeMin i — to what extent the current minimum is less than the previous one, by formula: if LOW i < LOW i — 1, then DeMin i = LOW i — 1 — LOW i, otherwise DeMin i = 0, where:

  • LOW i — the minimal price of the current bar;
  • LOW i — 1 — the minimal price of the previous bar.

After calculating of minima and maxima the index of the Demark indicator DeMarker i shall be defined, by formula DMark(i) = SMA(DeMax, N)/(SMA(DeMax, N) +SMA(DeMin, N)), where SMA is a simple moving average, N — the amount of periods of moving averages.

Initially, the DeMarker standard period is 13 days, but the author described the indicator as effective for other periods. In trading terminals, the standard period is often 14. On DeMarker longer periods you can define a long-term trend, shorter periods are used to open positions on the trend.

Pre-defined limits of oscillator overbought and oversold are: 0.7 (70%) and 0.3 (30%), but they can also be adjusted to a specific strategy, although it is not recommended for beginners (fig. 2).

Oscillator DeMarker: the border of overbought and oversold

Fig. 2

 

DeMarker oscillator in MetaTrader 5 platform

DeMarker oscillator is presented in not all trading terminals, but, for example, it is available in MT5 among the pre-installed tools. It can be downloaded from the navigation panel on the left, and you can change the parameters of the period and levels.

Sign in by broker’s terminal, add the DeMarker oscillator to the chart, and see what happens

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DeMarker oscillator signals

DeMarker generates the following main Forex trading signals, based on which you can carry out various strategies: a breakthrough of resistance/support levels, exit from the oversold and overbought zone, divergence and pattern formation. Overbought and oversold zones of the indicator are located at the levels of 0.3 and 0.7. Correspondingly, the crossing of 0.7 level by the indicator from top to bottom can be a sell signal, and the crossing of 0.3 level from bottom to top can be a buy signal.

Discrepancies are a classic signal of oscillators for Forex, it is very effectively used working with DeMarker. If prices update the maximum, and D shows a new maximum below the previous one, it is a bullish divergence, which indicates the impending change of trend from upward to downward. Conversely, if prices update the minimum, and DeMarker shows the minimum above the previous one, it is a bearish divergence and indicates the possible beginning of the rising price period.

In addition, the indicator may show a triple divergence, when the divergence is noted at three extrema in a row and such a signal is considered more accurate than the «usual» divergence. On the chart DeMarker shows trend lines, which are built on highs and lows. When the lower support line breaks through, it can be a sell signal. When the upper resistance line breaks through, it can be a buy signal.

It also forms classic graphical patterns on the chart – «triangle», «head and shoulders», «flag», «wedge» and others. The interpretation of these patterns differs from the interpretation of patterns on the price chart, so to work on them a trader must train on a demo account and have sufficient experience of Forex trading.

 

Trading strategies based on DeMarker oscillator

D is actively used in many Forex strategies. With its help it is possible to predict the price dynamics both on short and long periods. At long intervals, it allows you to determine the main trend, helps to filter false signals. The oscillator can be used with other Demark indicators, in particular with REI (Range Expansion Index, fig. 3), but most often it is used with different types of moving averages:

Trading strategies with DeMarker

Fig. 3

For example, DeMarker is used in a strategy with SMA. The strategy is implemented on a 15-minute timeframe. A buy position opens when Demarker with the values between 0 and 0.3 leaves the oversold area, with the SMA pointing upwards. A Sell position opens when D with values from 1 to 0.7 leaves the overbought area and the SMA is directed downwards (fig. 4):

Forex strategies with the Demarker oscillator

Fig. 4

The exponential moving average EMA with the period of 60 is applied together with the DeMarker indicator in one of the strategies on the pronounced trend. The price should be lower than the EMA signal, directed downwards. The signal to open positions for sale is DeMarker exit to the overbought zone and crossing the level of 0.7.

Strategies using the Demarker indicator

Fig. 5

On the contrary, the DeMarker exit to the oversold zone with the crossing of the level 0.3 and the placement of the EMA directed upwards is a signal to open a position to buy.

In the strategy, in which MACD (fig. 6) and DeMarker are used, these indicators complement each other. MACD shows extrema, it has fast and slow moving averages. Fast moving average evaluates short-term trend, slow – long-term trend, differences between them confirm the trends.

DeMarker oscillator in Forex strategies

Fig. 6

DeMarker in this strategy is necessary for the precise determination of entry points. Sell positions are opened when DeMarker is placed in the overbought zone, and MACD shows the maximum value.

In another strategy, apart from DeMarker and MACD also the Zigzag indicator (fig. 7) is used. It is carried out on extrema, cuts off insignificant price indicators. ZigZag values, peaks of the MACD histogram and overbought or oversold zones coincide. Positions are opened by the location of overbought or oversold areas, marked by DeMarker indicator. Other indicators confirm this signal.

Oscillator DeMarker and ZIGZAG

Fig. 7

DeMarker is a popular oscillator, so it has many different modifications that are used in different strategies, such as Cronex T DeMarker version and Heiken Ashi Smoothed indicator (fig. 8). The Heiken Ashi Smoothed indicator is a modification of the standard Heiken Ashi, in particular, there is a possibility to change the parameters of moving averages and methods of their averaging. This increases the sensitivity of the indicator both when tracking long-term trends and when tracking small price fluctuations. Cronex T DeMarker is the more complex modification of DeMarker, which is presented in the form of a histogram of different colors, which is built on the indicators of two lines of the moving average.

The installation file of Cronex T DeMarker for MT4 can be downloaded through the «Market», and for MT5 you can find the file in the third-party sources, checking its safety before downloading. Cronex T DeMarker can be downloaded to the chart through the «Catalogue» section under the «File» tab. The indicator is launched after the terminal restart.

In the strategy the signals to open positions are given by Heiken Ashi Smoothed, and the indicator serves as their confirmation. The strategy is implemented on the timeframes from M15 to H4. In the settings of Heiken Ashi Smoothed the parameter MaPeriod – 12 is set, the DeMarker parameter is 36. Positions to buy are opened when Heiken Ashi Smoothed shows the green candlesticks formed below the price – it means that the trend tends to be ascending. At the same time, on this type of oscillator, the blue line of Cronex T DeMarker crosses the multicolored line from bottom to top and the indicator forms candlesticks above zero.

Oscillator Demarker and Heiken Ashi Smoothed indicator

Fig. 8

Accordingly, if Heiken Ashi Smoothed shows the red candlesticks above the price, it indicates the formation of a downward trend and is a signal to sell. The signal is confirmed by the crossing the colored line downwards by blue line of Cronex T DeMarker.

DeMarker can be used in strategies with a very popular Stochastic indicator. For this purpose, DeMarker with a very long period is used to define the trend as accurately as possible. Stochastic is used to enter the trend at the end of the price correction period, taking into account the %K — fast and %D — slow lines.

For example, DeMarker period of 50 is set, the signal to open positions will be the exit of the indicator from the zone 0.5. Stochastic is set with parameters: %D — 6, %K — 20, deceleration — 5. Stochastic is determined by a relatively low price on an uptrend and a relatively high price on a downtrend. The first signal to both sell and buy will be the price movement backwards in the direction of the main trend after the correction has been exhausted. If DeMarker moves below 0.5, the main Stochastic line moves above 70, the signal line is below the main one, which is a signal to sell.

 

Summary

DeMarker is not quite a standard tool, but it has already gained the respect of traders, as it has many advantages. It is quite easy to use, it filters false signals well, shows overbought and oversold zones, and allows you to work according to graphical patterns.

DeMarker confidently shows signals with unambiguous interpretation, allows you to trade effectively on reversals. It is characterized by minimal data delay in comparison with many other indicators. At the same time, it has a number of disadvantages typical for oscillators, for example, a significant number of false signals at the beginning of the trend. Therefore, its optimal use with other tools. In this case, using DeMarker you can really increase the efficiency of trading.


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