DeMarker Indicator Strategy — What Is It? (Backtest)

Last Updated on August 28, 2022 by Oddmund Groette

Many trading indicators are available to traders. One of them is the DeMarker indicator, which was named after a prominent technical analyst Thomas DeMark who created it.

The DeMarker indicator, also known by the abbreviation “DeM”, is a technical indicator that measures the demand for the underlying asset. It compares the most recent high and low prices to those of the previous period to determine the direction of the trend and its momentum.

In this post, we take a look at the indicator and how to use it.

What is the DeMarker indicator?

Also known by the abbreviation “DeM”, the DeMarker indicator is a technical indicator that measures the demand for the underlying asset. It compares the most recent high and low prices to those of the previous period to determine the direction of the trend and its momentum.

The DeMarker indicator is a member of the oscillator family of technical indicators and can be used to identify high-risk buying (overbought) or selling (oversold) areas in a given market. Traders can also use it to determine when to enter a market, or when to buy or sell an asset, to capitalize on probable imminent price trends.

The indicator was originally created with daily price bars in mind, but you can apply it to any timeframe since it is based on relative price data. Designed to be a leading indicator, it attempts to signal an imminent change in price trend before it happens. Traders use it in combination with other signals to determine price exhaustion, identify market tops and bottoms, and assess risk levels.

DeMarker indicator formula

The DeMarker indicator works like the RSI oscillator, but unlike the latter, the former does not concern itself with closing levels. Instead, the DeMarker indicator focuses on intra-period highs and lows. It compares the high and low of the current bar on a chart to those of the previous bar such that, if the current bar has a higher high or a lower low than the previous bar, a value is recorded. On the other hand, if the current has a lower high or a higher low than the previous bar, a value of zero is recorded.

These values are used over a ‘look-back’ period (customarily 14 bars) to get a numerator (DeMax) and denominator (the sum of the moving averages of DeMax and DeMin), which is then used to calculate the DeMarker value by dividing the numerator by the denominator. Thus, the DeMarker indicator is the moving average of DeMax divided by the sum of the moving averages of DeMax and DeMin. The higher the value of DeMax relative to DeMin, the greater the value of the DeMarker Indicator.

The formula for calculating DeMarker values is given as follows:

DEM = SMA(DeMMAX) [SMA(DeMMAX) + SMA(DeMMIN)]

Where:

  • DEM stands for DeMarker
  • DeMMAX – records the difference between the current high and previous high over the number of X periods
  • DeMMIN – records the difference between the current low and previous low over the number of X periods

The equation yields values bounded between 0 and 1 — values of the indicator above 0.7 are considered overbought territory, and values of the indicator below 0.3 are considered oversold territory.

DeMarker indicator settings

Different platforms can set the indicator differently. But the default setting on most platforms is as follows:

  • The time span for the calculation of values = 14 periods
  • The base value = 0.5
  • The overbought and oversold lines = 0.7 and 0.3 respectively

However, you can change the settings to what you want. The larger the number of periods you use, the smoother the curve of the DeMarker Indicator, and the smaller the number of periods, the more responsive the curve. So, if you use a shorter period, which would give sharper oscillations, you might want to consider a higher value than 70 for the overbought line and a lower value than 30 for the oversold line. Similarly, if you use a larger period, you might want to consider a lower boundary for overbought, and a higher one for oversold.

How do you use the DeMarker indicator?

Use the DeMarker indicator for a contrarian strategy. That is, you look for a buying opportunity when the indicator is showing oversold and a selling opportunity when the indicator is showing overbought. The closer the value gets to 0 or 1, the higher the likelihood of a price turn as the market is trading in an extreme environment.

However, you will need to combine DeMarker with a trend-confirming indicator, such as a moving average. In an uptrend, look for only buying setups — oversold DeMarker. In a downtrend, look for only shorting opportunities when the DeMarker is overbought.

DeMarker indicator trading strategy (backtest and example)

A backtest of the DeMarker indicator trading strategy is coming soon.

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