DeMarker

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  1. DeMarker

The DeMarker indicator is a relatively modern technical analysis tool, developed by Jason Demark, designed to identify potential market reversals. Unlike many indicators that attempt to predict *when* a reversal will occur, the DeMarker focuses on identifying *where* a reversal is likely to happen, specifically near extreme overbought or oversold levels. It’s a momentum oscillator, but with a unique construction that makes it particularly effective in identifying exhaustion in trends and potential turning points. This article provides a comprehensive overview of the DeMarker indicator, suitable for beginners, covering its calculation, interpretation, strengths, weaknesses, and how to effectively integrate it into a trading strategy.

History and Background

Jason Demark is a renowned market analyst known for his work in pattern recognition and predictive analytics. He founded Demark Analytics and has consulted for numerous institutional investors. The DeMarker indicator was introduced in 1995 as part of his broader suite of trading tools, designed to provide a more objective and reliable method for identifying high-probability trading setups. Unlike indicators based on smoothing techniques (like Moving Averages), the DeMarker emphasizes the relationship between current price and price range over a specific period. This emphasis provides a different perspective on momentum and can often signal reversals before traditional oscillators. It’s a core component of Demark's methodology, which focuses on identifying exhaustion patterns and anticipating trend changes.

Calculation of the DeMarker

The DeMarker calculation is somewhat more complex than simpler oscillators like the RSI or Stochastic Oscillator, but understanding the steps is crucial for proper interpretation. Here's a breakdown:

1. **Calculate High Delta (HD):** For each period (typically 14 periods, though this can be adjusted), calculate the difference between the current high and the highest high of the past *n* periods. HD = Current High - Highest High of the past *n* periods. 2. **Calculate Low Delta (LD):** Similarly, calculate the difference between the current low and the lowest low of the past *n* periods. LD = Current Low - Lowest Low of the past *n* periods. 3. **Calculate Delta Sum (DS):** Add the High Delta and Low Delta values. DS = HD + LD 4. **Calculate Delta DM (Demark Momentum):** This is the core calculation. It’s calculated as (DS / (High - Low)) * 100. This effectively normalizes the delta sum relative to the period's range. (DS / (High - Low)) * 100. 5. **Calculate DeMarker:** The DeMarker is a 16-period Exponential Moving Average (EMA) of the Delta DM. This smooths the Demark Momentum values, creating the final indicator line.

This calculation results in a value typically ranging between 0 and 100. Most charting platforms will automatically calculate the DeMarker for you, but understanding the underlying logic is essential for interpreting its signals. The period settings (14 for initial calculations and 16 for the EMA) are standard, but traders often experiment with different settings to optimize the indicator for specific markets or timeframes. Exponential Moving Average is key to understanding the smoothing of the DeMarker.

Interpretation of the DeMarker

The DeMarker’s interpretation revolves around identifying overbought and oversold conditions. However, unlike traditional oscillators, the DeMarker has specific thresholds for these conditions.

  • **Overbought:** Readings above 90 are generally considered overbought, suggesting the price may be due for a correction or reversal. However, the DeMarker doesn't simply signal a sell when it crosses above 90. Instead, traders look for *divergence* between the price and the DeMarker in overbought territory.
  • **Oversold:** Readings below 10 are generally considered oversold, suggesting the price may be due for a bounce or reversal. Similar to overbought conditions, traders look for *divergence* between the price and the DeMarker in oversold territory.
  • **Divergence:** This is the most important signal generated by the DeMarker.
   * **Bearish Divergence:** Occurs when the price makes a higher high, but the DeMarker makes a lower high. This suggests that momentum is weakening despite rising prices, signaling a potential bearish reversal. Divergence (Technical Analysis) is a critical concept here.
   * **Bullish Divergence:** Occurs when the price makes a lower low, but the DeMarker makes a higher low. This suggests that momentum is strengthening despite falling prices, signaling a potential bullish reversal.
  • **Breakouts:** Strong breakouts are often accompanied by the DeMarker moving decisively above 90 (for bullish breakouts) or below 10 (for bearish breakouts).
  • **Trend Confirmation:** In strong trends, the DeMarker will typically remain in overbought (uptrend) or oversold (downtrend) territory for extended periods. This confirms the strength of the trend.
  • **Centerline Crossover:** While less emphasized than divergence, a crossover of the DeMarker line above the 50 level can be seen as a bullish signal, and a crossover below 50 as a bearish signal.

Strengths of the DeMarker

  • **Early Reversal Signals:** The DeMarker often identifies potential reversals *before* other oscillators due to its unique calculation focusing on price range.
  • **Clear Overbought/Oversold Levels:** The 90/10 thresholds provide clear guidance for identifying extreme conditions.
  • **Divergence Focus:** The emphasis on divergence makes the DeMarker less prone to false signals compared to relying solely on overbought/oversold levels. Trading Signals are often highlighted through divergence.
  • **Works Well Across Markets:** The DeMarker can be applied to various markets, including stocks, forex, commodities, and cryptocurrencies.
  • **Objective Rules:** The calculation and interpretation are relatively objective, reducing subjective bias in trading decisions.

Weaknesses of the DeMarker

  • **Lagging Indicator:** Like all momentum oscillators, the DeMarker is a lagging indicator, meaning it's based on past price data. This can lead to delayed signals.
  • **Whipsaws in Sideways Markets:** In choppy, sideways markets, the DeMarker can generate frequent false signals (whipsaws) as it oscillates between overbought and oversold levels. Sideways Market conditions can be challenging.
  • **Parameter Sensitivity:** The performance of the DeMarker can be sensitive to the chosen period settings (14 and 16). Optimization is often required for different markets and timeframes.
  • **Not a Standalone System:** The DeMarker should not be used in isolation. It's best used in conjunction with other technical analysis tools and fundamental analysis.
  • **Complexity:** The calculation, while not overly difficult, is more complex than simpler indicators, which might deter some beginners.

Integrating the DeMarker into a Trading Strategy

Here are a few strategies for incorporating the DeMarker into your trading plan:

1. **Divergence Trading:** This is the most common and effective strategy.

   * **Bullish Divergence:** Wait for bullish divergence (price makes a lower low, DeMarker makes a higher low) in an oversold area (below 10).  Confirm the signal with other indicators (e.g., MACD, Volume, Fibonacci retracements). Enter a long position when the price breaks above a recent swing high.
   * **Bearish Divergence:** Wait for bearish divergence (price makes a higher high, DeMarker makes a lower high) in an overbought area (above 90). Confirm the signal with other indicators. Enter a short position when the price breaks below a recent swing low.

2. **Overbought/Oversold with Confirmation:**

   * **Oversold Bounce:** When the DeMarker falls below 10, look for bullish price action (e.g., a bullish candlestick pattern) to confirm a potential bounce.
   * **Overbought Exhaustion:** When the DeMarker rises above 90, look for bearish price action (e.g., a bearish candlestick pattern) to confirm a potential pullback.

3. **Breakout Confirmation:**

   * **Bullish Breakout:** During a strong uptrend, wait for the DeMarker to move decisively above 90 to confirm the breakout.
   * **Bearish Breakout:** During a strong downtrend, wait for the DeMarker to move decisively below 10 to confirm the breakout.

4. **Combined with Trend Following:** Use the DeMarker to identify pullbacks within an established trend. For example, in an uptrend, wait for the DeMarker to become oversold (below 10) before entering a long position.

    • Risk Management:** Always use stop-loss orders to limit potential losses. Place stop-loss orders below recent swing lows (for long positions) or above recent swing highs (for short positions). Consider using a risk-reward ratio of at least 1:2. Risk Management is crucial for consistent profitability.

DeMarker vs. Other Oscillators

| Feature | DeMarker | RSI | Stochastic Oscillator | MACD | |---|---|---|---|---| | **Calculation** | Based on price range (High Delta, Low Delta) | Based on average gains and losses | Based on closing price relative to the range | Based on moving averages of price | | **Overbought/Oversold Levels** | 90/10 | 70/30 | 80/20 | N/A (uses centerline crossover) | | **Divergence** | Strong emphasis | Common | Common | Common | | **Sensitivity** | Moderate | Moderate | High | Low | | **Lag** | Moderate | Moderate | High | Low | | **Best Use Case** | Identifying early reversals, exhaustion patterns | Identifying overbought/oversold conditions, momentum | Identifying short-term overbought/oversold conditions | Identifying trend changes, momentum | | **Related Indicators** | Williams %R, Chaikin Oscillator | Average True Range (ATR), Commodity Channel Index (CCI) | Bollinger Bands, Price Rate of Change (ROC) | On Balance Volume (OBV), ADX |

Advanced Considerations

  • **Multiple Timeframe Analysis:** Use the DeMarker on multiple timeframes to confirm signals. For example, identify bullish divergence on the daily chart and then look for confirmation on the hourly chart. Timeframe Analysis can improve accuracy.
  • **Optimizing Period Settings:** Experiment with different period settings for the initial calculation (14 periods) and the EMA (16 periods) to find the optimal settings for the specific market you are trading.
  • **Combining with Price Action:** Always consider price action alongside the DeMarker signals. Look for candlestick patterns, support and resistance levels, and trendlines to confirm your trading decisions. Candlestick Patterns provide valuable insights.
  • **Volume Analysis:** Confirm DeMarker signals with volume analysis. Increasing volume during a breakout or divergence can strengthen the signal. Volume is a key indicator of market participation.
  • **Backtesting:** Before implementing any trading strategy based on the DeMarker, thoroughly backtest it on historical data to assess its performance. Backtesting helps validate your strategy.

Resources for Further Learning


Technical Analysis

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