The Demarker indicator is an oscillator that shows oversold and overbought areas. The main task of this technical tool is to search for highs and lows, finding the moments when the market is depleted, and there is a high probability of a reversal. The demarker can also be used to confirm the direction and strength of market trends.
What is the Demarker indicator?
The technical indicator of Thomas Demark is based on comparing the highs of the current bar in comparison with the peak of the previous bar. When the high of the current candle is higher than the previous one, this difference is fixed. When the current high is less than the previous one or equal to it, then a zero value is fixed. Then the differences for a certain number of periods are summed up.
The value obtained in the manner described above becomes the numerator of the demarker indicator. It is divided by this value, plus the sum of the differences between the low of the previous and current bars. When the current low is greater than the previous bar, a zero value is fixed.
The Demarker indicator is often used as a filter in forex trading strategies for attempting to reduce the number of false signals. If we consider a simple description, then the demarket indicator rules could be:
- When the line is above the 0.7 mark there may be a market reversal for a sell trade
- When the line is below the 0.3 mark there may be a market reversal for a buy trade
- Use of trend lines: if the line is directed up and a curve breaks through it, this could be an opportunity to buy an asset, if there is a downward line, you may look to sell an asset
How to use the Demarker indicator?
The main essence of the demarker indicator is that it can identify areas of price depletion, which most often correspond to local extremes (highs and lows). Identifying overbought and oversold market conditions is one of the most common uses of oscillator technical indicators which also include the stochastics oscillator and CCI.
The oscillator works best when the ranges appear, but when there is a strong trend, it is best to check the signals using it as an auxiliary tool. Its formula is similar to the RSI indicator formula, when applying both instruments on the price chart, their curves will be quite symmetrical.
The creation of Thomas Demark is very popular as many strategies implement it today as an additional filter. In the MT4 trading terminal, it is built-in as a standard indicator and thus easily accessible to any trader. When you open the tool, a window appears with the settings that are most often left standard. You can however adjust the periods and levels to suit your forex trading strategy.
What happens if you change the Demarker periods?
In this case, the indicator will become more sensitive to price movements. Accordingly, the chance of generating false signals will proportionally increase. If the period is increased, a more global trend will be displayed, but the signals may be delayed.
Experienced traders do not recommend trading only on the demarker indicator since this can generate too many false signals. Using it as part of a more complete trading system will be much more effective and justified:
- A strategy which is built on at least two technical indicators and other market analysis can generate more reliable buy and sell signals
- The demarker system can be combined with RSI operating over four different periods. According to their values, weighted average lines are built, signals are sent to enter/exit the market. They can be filtered depending on ranging or trending market conditions.
- Trading on the demarker trend lines – first, reference points are determined, and a trend line is built, and then the search for optimal moments for concluding deals is carried out.
- Suitable for any type of trading style, all time frames and trading instruments.
Demarker trading strategy
To understand what information the demarker indicator provides, why, and how to interpret, it is necessary to consider its operation on the price chart.
Signals that the indicator gives:
- Demonstration of oversold/overbought zones is a classic task for the oscillator. If the indicator falls below 0.3, and then gradually increases, it can signal a market reversal in the buy direction.
- If the line intersects with the chart above 0.7 from bottom to top and then falls, it can signal a market reversal in the sell direction.
- Double, triple divergence (discrepancy between demarker and price chart) – when the price shows two rising highs in succession, and demarker shows a fall. In this case, the upward trend may be replaced by a downward trend. The same applies to the divergence of local lows. When the divergence is triple (in three valleys or peaks), the signal may be considered even stronger.
Demarker indicator conclusion
The demarker indicator is a great technical tool to help forex traders confirm the trend and strength of a currency pair. The demarker can also be used on trading instruments from other asset classes such as stocks, commodities and cryptocurrencies. The demarker can give easy to identify trend trading or reversal trading signals for buying or selling an asset although it should be used as part of a more complete forex strategy.
The methods of implementing the demarker indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the demarker indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.