This is the second article in our Demarker series. If you haven’t already we suggest that you check out the first article about the DeMarker Indicator. In that article, we covered the background of the DeMarker, or “DeM”, indicator, how it is calculated, and how it looks on a chart. 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 indicator 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.
How to Read a DeMarker Chart
The DeM indicator with a period setting of “14” is presented on the bottom portion of the above “15 Minute” chart for the “AUD/USD” currency pair. In the example above, the “Green” line is the DeM, while the “Red” line, added as an additional option on the “Metatrader 4” platform, represents an exponential moving average for fourteen periods. DeMarker values below 0.30 and over 0.70 are worthy of attention.
The key points of reference are highpoints and lowpoints, especially when respective values approach zero or “1.0”. The “DeM Rollercoaster” tends to work better for longer timeframes, i.e., daily, but shorter periods can be accommodated as shown here. The DeM indicator attempts to convey price exhaustion, but timing is a weakness that can be overcome with the use of another indicator for validation. In the above chart, two overbought and two oversold conditions are evident by virtue of the various “limit” crossovers.
As with any technical indicator, a DeMarker chart will never be 100% correct. False signals can occur, but the positive signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding DeM signals must be developed over time, and complementing the DeMarker tool with another indicator is always recommended for further confirmation of potential trend changes.
In the next article on the DeMarker indicator, we will put all of this information together to illustrate a simple trading system using this DeM oscillator.
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