DeMarker Indicator Explained

Definition of the DeMarker Indicator:

The DeMarker indicator gauges the high and low prices of the asset and compares it with the previous period’s high and lows prices for the same asset so as to measure the demand on the asset.

demarkerThe DeMarker indicator is classified as an oscillator, and is calibrated from 0.0 to 1.0 on the MT4 platform. It is therefore considered worthy of use as an overbought/oversold indicator, so that when the value of the DeMarker indicator rises above 0.7 on the indicator window, this is considered an overbought situation and the trader is expected to prepare to short the asset to benefit from the downside reversal that will follow. When the indicator value is at 0.3 and lower, this is an oversold situation and is considered a bullish signal worthy of a long trade.

Components of the DeMarker

The DeMarker indicator is made up of two components. These are:

a) The DeMax: This component compares the high price of the current candle with the previous candle’s high.
b) The DeMin compares the current candle’s low price with the previous candle’s low.

The moving averages of these two components are then brought together to create the DeMarker indicator. Apart from the 14-period simple moving average, the trader can use the exponential or weighted moving average in the calculation of the DeMarker indicator.

Usage of Indicator

Apart from the use of the DeMarker indicator as a measure of overbought and oversold market conditions, the DeMarker can also be used for trading the divergence between the indicator and the price of the asset, as well as for indicator line support /resistance breakout situations.

Indicator Settings

The indicator is listed on the MT4 as an oscillator indicator. To attach it to the MT4 chart, click on Insert -> Indicators -> Oscillators-> DeMarker

The indicator lines of the Relative Vigor Index indicator can be enhanced by either increasing the line thickness or by changing the colour of the indicator lines to make them more visible. The period can also be adjusted, but it is best to leave it at the default settings of 10.

Usage of the DeMarker Indicator in Forex Trading

The DeMarker Indicator can be used in forex trading in the following ways:

a)Divergence Trades

The DeMarker indicator can be used in divergence trades. The divergence in this case would be to look to see where the peaks and troughs of price action deviate from the peaks and troughs of the DeMarker indicator. Trend lines are used to connect the peaks and troughs of both price action and the DeMarker indicator. Whenever a divergence is detected, it represents a trading opportunity as price action will try to correct the divergence. The divergence situation is seen when the trend lines of price and the DeMarker indicator are going in different directions. The entry for any divergence trade must be made using technical parameters such as candlestick or chart patterns.

DeM_diverg

The example above shows a typical divergence trade. The DeMarker indicator is displaying lower highs while the price action is making higher highs. This is a bearish divergence and price is expected to correct downwards to tally with the DeMarker indicator. After identifying the divergence, the short trade is setup using a sound technical basis. The exit point of this trade is when price gets to levels identified by the RVI indicator as being in oversold territory. In this example, the move was helped by negative market news for the British Pound: who will complain, if the move supports the technical play? Simply ride the move and bank your pips.

b)Indicator Breakout Trade

We also see a breakout trade using the indicator and a technical setup on the chart. For instance, the chart below shows how to use a break of indicator resistance and a technical setup on the charts to setup a perfect trade.

DeM_breakout

The daily chart here shows a falling wedge, with the breakout to the upside occurring when the erstwhile resistance (plotted with a trend line) on the indicator was also broken by the indicator’s movement. The exact breakout area coincided with the breakout of the price action from the upper trend line of the falling wedge. This demonstrates how to use the DeMarker indicator as a support-resistance trade tool.

c)Overbought/Oversold Indicator

Another way that the DeMarker indicator can be used is as an overbought/oversold indicator. Here we see the indicator showing oversold (buy) signals and overbought (sell) signals. If there is a corresponding reason on the charts to buy at oversold areas or to sell at overbought areas, then this is another trade that could be taken. Candlestick patterns and chart patterns can be used in this manner liberally.

Conclusion

Make sure you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management.

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