DeMarker Indicator is the technical indicator matching current High with the previous Highs. For the first time DeMarker Indicator was published in the book by Thomas DeMark called "The New Science of Technical Analysis". Originally, Mr. DeMark wondered if it is possible to create such a technical instrument that would have no drawbacks encountered by the most part of popular indicators. The author introduces indicator as overbought/oversold index with the areas showing exhaustion of price.
Measurement formula for DeMarker Indicator:
Measurement of DeMax (i):
If HIGH (i) > HIGH (i - 1), then DeMax (i) = HIGH (i) - HIGH (i - 1), otherwise DeMax (i) = 0
Measurement of DeMin (i):
If LOW (i) < LOW (i - 1), then , then DeMax (i) = LOW (i - 1) - LOW (i), otherwise DeMax (i) = 0
HIGH (i) – High price of current bar;
LOW (i) – Low price of current bar;
HIGH (i-1) – High price of previous bar;
LOW (i-1) – Low price of previous bar;
SMA – simple moving average;
N – the number of periods used for measurement.
A number of conditional correlations can be found in the formula: if Low price of current bar is above High price of previous bar, the difference between is fixed; otherwise, zero value is assigned. Lowest points are correlated in the same way: if Lowest price of current bar is less than Low price of previous bar, the difference is fixed; otherwise, zero value is assigned. Total value of the DeMarker Indicator is the ratio of simple moving averages obtained from difference between Highs to the sum amount of simple moving averages obtained from difference between Highs and Lows for N amount of considered periods.
Pic. 1 – DeMarket Indicator
The indicator's values range from 0 to 1. According to Thomas DeMark, when values rise above 0.7, the market is in overbought zone and soon you can expect decline. If values are below 0.3, the market is oversold and one can expect prices will go up.
Let's consider what trading signals can be conveyed by the indicator.
Leaving overbought/oversold zones -
Signal for sale occurs when indicator values cross 0.7 from bottom to top. Signal for sale is crossing of 0.3 from bottom to top.
Pic. 2 – Signals of leaving overbought/oversold zones
As the most part of oscillators, this one also provides bullish divergence and bearish convergence. The first one appears when chart price reaches a new High, and indicator does not confirm a new extreme point.
Pic. 3 – Bullish divergence
Bearish convergence appears when chart price accomplished a new Low, and indicator does not confirm a new extreme point.
Pic. 4 – Bearish convergence
Main disadvantage of DeMarker indicator is the presence of a good many of false signals directing to the opposite, if there is a trend on market. But this drawback can be neutralized by other not less efficient methods of finding market tendency. In general the indicator is rather useful and can find its supporters.
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