Demarker

1. Demarker

The Demarker (DeM) is a market momentum indicator developed by Tom Demarker, designed to identify overbought and oversold conditions in a financial market. It’s a relatively simple indicator, but effective when used in conjunction with other Technical Analysis tools. This article provides a comprehensive guide to understanding and utilizing the Demarker indicator, geared towards beginner traders.

Introduction

Tom Demarker, a renowned trading educator and author of "Market Timing with Moving Average Crossovers," created the Demarker indicator as a means of gauging the strength of price movements. Unlike many momentum oscillators that focus on rate of change, the Demarker focuses on the *range* of price movement over a specified period. This approach can be particularly useful in identifying potential reversals or continuations of trends. The Demarker is often used in conjunction with price action, volume analysis, and other indicators to confirm trading signals.

How the Demarker is Calculated

The Demarker calculation involves a few steps. Let's break it down:

1. **High-Low Range:** For each period (typically 14 periods, though this can be adjusted), calculate the difference between the highest high and the lowest low. This represents the price range for that period.

2. **Sum of Up Moves:** Calculate the sum of the differences between successive highs. If the current high is lower than the previous high, the difference is zero.

3. **Sum of Down Moves:** Calculate the sum of the differences between successive lows. If the current low is higher than the previous low, the difference is zero.

4. **Demarker Calculation:** The Demarker is then calculated using the following formula:

  DeM = ((Sum of Up Moves) / (Sum of Up Moves + Sum of Down Moves)) * 100

  This formula essentially represents the percentage of price movement that has been upward.

Understanding the Demarker Values

The Demarker oscillates between 0 and 100. Here's a breakdown of how to interpret the values:

• **Overbought Zone (Above 90):** When the Demarker rises above 90, it suggests the market is overbought. This doesn't necessarily mean a reversal is *imminent*, but it signals that the upward momentum is weakening and a correction or consolidation is possible. Traders often look for divergence (see section below) in this zone to confirm potential bearish signals.

• **Oversold Zone (Below 10):** When the Demarker falls below 10, it suggests the market is oversold. Similar to the overbought zone, this doesn't guarantee an immediate bounce, but indicates that downward momentum is weakening and a potential rally is possible. Divergence in this zone can confirm potential bullish signals.

• **Neutral Zone (10-90):** Values between 10 and 90 generally indicate a neutral market condition. The Demarker can remain within this zone for extended periods, especially during trending markets.

Trading Signals with the Demarker

The Demarker can generate several trading signals when used correctly.

• **Overbought/Oversold Signals:** As mentioned above, crossing the 90 (overbought) and 10 (oversold) levels can be used as potential entry or exit points. However, relying solely on these levels can lead to false signals, particularly in strong trending markets. Confirmation with other indicators is crucial.

• **Centerline Crossovers:** Crossovers of the Demarker line with the 50 level can also provide trading signals.

   * **Bullish Crossover:** When the Demarker crosses *above* 50, it suggests bullish momentum is building, and a long position might be considered.
   * **Bearish Crossover:** When the Demarker crosses *below* 50, it suggests bearish momentum is building, and a short position might be considered.

• **Divergence:** This is arguably the most powerful signal generated by the Demarker. Divergence occurs when the price action and the Demarker move in opposite directions.

   * **Bullish Divergence:**  The price makes lower lows, but the Demarker makes higher lows. This suggests that the downward momentum is weakening, and a potential bullish reversal is likely.  This is a strong signal, especially when combined with other bullish indicators like a Moving Average Crossover.
   * **Bearish Divergence:** The price makes higher highs, but the Demarker makes lower highs. This suggests that the upward momentum is weakening, and a potential bearish reversal is likely.  This is a strong signal, especially when combined with other bearish indicators like Fibonacci Retracement.

• **Failure Swings:** Failure swings occur when the Demarker fails to reach a new high (in an uptrend) or a new low (in a downtrend).

   * **Bearish Failure Swing:** In an uptrend, if the Demarker makes a new high, but then fails to make a higher high on the next attempt, it can signal a potential reversal.
   * **Bullish Failure Swing:** In a downtrend, if the Demarker makes a new low, but then fails to make a lower low on the next attempt, it can signal a potential reversal.

Optimizing the Demarker Settings

The default Demarker setting is typically 14 periods. However, this setting may not be optimal for all markets or timeframes. Experimentation is key.

• **Shorter Period (e.g., 7):** A shorter period will make the Demarker more sensitive to price changes, resulting in more frequent signals. This can be useful in fast-moving markets, but also increases the risk of false signals.

• **Longer Period (e.g., 21):** A longer period will make the Demarker less sensitive to price changes, resulting in fewer signals. This can be useful in filtering out noise and identifying longer-term trends.

• **Market Specificity:** Different markets may require different settings. For example, a more volatile market might benefit from a longer period, while a less volatile market might benefit from a shorter period.

It’s recommended to backtest different settings on historical data to determine the optimal settings for your chosen market and timeframe. Backtesting is a critical step in validating any trading strategy.

Combining the Demarker with Other Indicators

The Demarker is most effective when used in conjunction with other Trading Indicators. Here are some common combinations:

• **Demarker + MACD:** The MACD can help confirm the signals generated by the Demarker. For example, a bullish divergence on the Demarker combined with a bullish crossover on the MACD is a strong bullish signal.

• **Demarker + RSI:** The RSI (Relative Strength Index) is another popular momentum indicator. Confirming signals from both the Demarker and RSI can increase the probability of a successful trade.

• **Demarker + Volume:** Analyzing volume can help confirm the strength of the signals generated by the Demarker. For example, a bullish divergence on the Demarker combined with increasing volume is a stronger signal than a bullish divergence with decreasing volume.

• **Demarker + Bollinger Bands:** Bollinger Bands can help identify volatility and potential breakout points. Combining the Demarker with Bollinger Bands can provide additional confirmation of trading signals.

• **Demarker + Stochastic Oscillator:** Similar to the RSI, the Stochastic Oscillator can confirm overbought/oversold signals generated by the Demarker.

Demarker vs. Other Momentum Indicators

The Demarker differs from other momentum indicators like the RSI and Stochastic Oscillator in its calculation.

• **RSI:** The RSI measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. It focuses on the *rate* of change.

• **Stochastic Oscillator:** The Stochastic Oscillator compares a security's closing price to its price range over a given period. It also focuses on the *rate* of change.

• **Demarker:** The Demarker, as mentioned earlier, focuses on the *range* of price movement. This can make it more effective in identifying potential reversals in ranging markets.

Each indicator has its strengths and weaknesses. The best indicator for a particular situation depends on the market conditions and the trader's individual style. Indicator Selection is a crucial skill for any trader.

Limitations of the Demarker

While the Demarker can be a valuable tool, it’s important to be aware of its limitations:

• **False Signals:** Like all indicators, the Demarker can generate false signals, especially in strong trending markets.

• **Lagging Indicator:** The Demarker is a lagging indicator, meaning it is based on past price data. This means it may not always accurately predict future price movements.

• **Parameter Sensitivity:** The Demarker is sensitive to the period setting. Choosing the wrong setting can lead to inaccurate signals.

• **Whipsaws:** In choppy markets, the Demarker can generate frequent whipsaws (false signals) as the price fluctuates rapidly.

Risk Management

Regardless of the indicators you use, proper Risk Management is essential for successful trading. Always use stop-loss orders to limit your potential losses. Never risk more than a small percentage of your trading capital on any single trade (typically 1-2%). Consider using position sizing techniques to adjust your trade size based on your risk tolerance and the volatility of the market.

Example Trade Setup (Bullish Divergence)

Let's illustrate a potential trade setup using bullish divergence with the Demarker:

1. **Identify a Downtrend:** The price is in a clear downtrend, making lower highs and lower lows.

2. **Demarker Makes Higher Lows:** The Demarker is making higher lows, while the price is making lower lows. This is bullish divergence.

3. **Confirmation:** Wait for confirmation from another indicator, such as a bullish MACD crossover or increasing volume.

4. **Entry Point:** Enter a long position when the price breaks above a recent resistance level or when the confirming indicator gives a signal.

5. **Stop Loss:** Place a stop-loss order below the recent low.

6. **Take Profit:** Set a take-profit target based on a risk-reward ratio of at least 1:2.

Conclusion

The Demarker is a powerful momentum indicator that can help traders identify potential reversals and continuations of trends. By understanding its calculation, interpretation, and limitations, and by combining it with other indicators and sound risk management practices, traders can increase their chances of success in the financial markets. Remember to practice and backtest your strategies before risking real capital. Further study of Chart Patterns and Candlestick Patterns will also enhance your trading skills. Finally, continuous learning and adaptation are key to long-term success in trading.

Technical Indicators Momentum Trading Trend Following Trading Strategies Market Analysis Trading Psychology Risk Management Strategies Candlestick Analysis Price Action Trading Swing Trading

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