The DeMarker, or “DeM”, indicator is another member of the “Oscillator” family of technical indicators. Tom Demarker created the DeM in an attempt to measure the demand for the underlying currency pair. The DeM indicator relates recent price action to recently closed prices. Traders use the index to determine overbought and oversold conditions, assess risk levels, and time when price exhaustion is imminent.
The DeMarker is classified as an “oscillator” since the resulting curve fluctuates between values of zero and “1”, although some variants of the indicator have a “100” and “-100” scale. The indicator typically has lines drawn at both the “0.30” and “0.70” values as warning signals. Values exceeding either boundary are deemed more risky, while values within are considered low risk. Overbought and oversold conditions are imminent when the curve crosses over these boundary lines, respectively.
The DeM indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:
- Choose a predetermined period “X” (Standard value is “14”, although a value of “8” or “9” tends to be more sensitive);
- Calculate DeMax = High – Previous High if >0, otherwise DeMax = 0;
- Calculate DeMin = Previous Low – Low if >0, otherwise DeMin = 0;
- DeM = MA of DeMax/(MA of DeMax + MA of DeMin).
Software programs perform the necessary computational work and produce a DeM indicator as displayed in the bottom portion of the following chart:
The DeM indicator is composed of a single fluctuating curve. Traders will occasionally add an exponential moving average, as above in red, to enhance the value of the trading signals. In the example above, the “Green” line is the DeMarker, while the “Red” line represents an “EMA” for the same period variable of “14”. The DeMarker is viewed as a “leading” indicator, in that its signals foretell that a change in trend is imminent. The weakness in the indicator is that timing is not necessarily a product of the DeM, the reason for attaching a “lagging” moving average to confirm the DeM signal.
The DeMarker indicator tends to pick major bottoms better than tops. A shorter period setting will create a more sensitive indicator, but will also increase choppiness and the potential for increased false signals.
The next article in this series on the DeMarker indicator will discuss how this oscillator is used in forex trading and how to read the various graphical signals that are generated.
Next Article >> An example strategy based on the Demarker Indicator >>