This is the third article in our Demarker series. If you haven’t already, we suggest that you check out the first article about the DeMarker Indicator. In the previous two articles, we have covered the background, the calculations involved, and how to use and read the DeM indicator. 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.
Forex traders focus on the DeMarker key points of reference, which are highpoint and lowpoint limit crossovers. As with any technical indicator, a DeM chart will never be 100% correct in the signals that it presents, but the signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding DeM indicator signals must be developed over time. In the example below, let’s develop a simple trading system based on DeMarker signals and alerts.
The following trading system is for educational purposes only. Technical analysis takes previous pricing behavior and attempts to forecast future prices, but, as we have all heard before, past results are no guarantee of future performance. With that disclaimer in mind, the “green” circles on the above chart illustrate optimal entry and exit points that can be discerned from using DeMarker analysis in combination with the added EMA in red.
A simple trading system would then be:
- Determine your entry point when the “green” DeM line dips below the “0.30” lower limit line and then re-crosses the limit line in an upward motion;
- Execute a “Buy” order for no more than 2% to 3% of your account;
- Place a stop-loss order at 20 “pips” below your entry point;
- Determine your exit point after the DeM crosses and drops below the “0.70” upper limit line and is followed by the EMA “red” line fully penetrating a candlestick.
Steps “2” and “3” represent prudent risk and money management principles that should be employed. This simple trading system would have yielded two profitable trades of 50 and 40 “pips”, but do remember that the past is no guarantee for the future. However, consistency is your objective, and hopefully, over time, Demarker Technical Analysis will provide you with an “edge”.
That concludes our series on the DeMarker Indicator. For further reading please see all our Forex indicators.
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We also recommend you to learn more about the Alligator indicator.