Tom Demarker has developed the Demarker indicator in order to overcome the various shortcomings of the different oversold/overbought oscillators. Among the various version that are available in the market, 0 and 1 are used as the minimum and maximum limit for the indicators whereas some of the indicators have 0-100 range preference.
The levels between 3 and 7 represent a continuous phase for a neutral level. It should be noted here that price being in an uptrend and the indicator values are also rising, it supports a rising trend in the market. On the other hand, if price is an uptrend and the indicator values are falling, it leads to the occurrence of reversal or divergence. There is no denying the fact that it will reduce the momentum rate and lead to an abrupt reversal in the marketing trend. In the other way round, with the downtrend of the price and the indicator values rising, it leads to a weak downtrend. It has been seen that if the price and the indicator values are in uptrend, the pattern is scheduled to develop.
The lower part of the chart clearly depicts the Demarker indicator in move. Breaking at 1.4575 levels and the price does not reach here; the indicator just goes back and forth at the neutral 0.5 level. So, whenever the indicator goes below 0.5 it confirms the downtrend and thereafter it reverses itself after reaching close to 0 and approaches 0.3. The above example keeps the rice action conclusive and MA line safe although the divergence is developing. Hence, the traders should keep in mind that you should not derive any conclusions without any clear signals behind a particular position and that will keep you save in the pattern.
Calculation of the Indicator
While calculating the Demarker indicator, we must have the values of Demin or Demax which are the lows and highs for the market in any given time interval. Both the values are then used in a formula that itself gives the required indicator value.
The Demin value is set at the difference of highs of the two line periods of the consecutive days given the today’s high value is greater than that of the yesterday high. On the other hand, Demax value is set to 0. And, similar is the case with the lows of consecutive days. Demin value is set at the difference of the lows of the two days, given the todays low is lower than the yesterday value. Otherwise, it is set to 0 if yesterday’s low value is equal to or lower than the value of today.
The formula used in this case is
DeMark = N-period Moving Average of DeMax / (N-period Moving Average of DeMax + N-period Moving Average of DeMin)
Most of the time, the simple moving average is used for the calculation although there are various types of moving averages.
This formula clearly depicts that higher Demax values will result in higher indicator values and it will fall given the moving average related to the lows attain higher values.
Trading with the Demarker Indicator
All the techniques that are applied to oscillators may be applied here because Demarker Indicator is an oscillator. 0.3 and 0.7 are the oversold and oversold indicator levels, respectively. The prices are ought to fall if oversold value exceeds otherwise the uptrend will run out in less time.
The construction of both the RSI and the Demarker indicator is nearly the same except that the first one uses an exponential type of moving average rather the second one makes use of the simple moving average of the prices. It should be kept in mind that both the indicators compute in the same way as far as their mechanism is concerned and take into account the min and max values of the prices in the similar way.
In fact, creation of any type of technical strategy is not required given both of the above indicators are necessary. Since, both of them are oscillators and they have most of the things common in calculation and hypothesis it is customary for the customers or traders to have the same information with the help of one about the other.
Ranging market is suitable for an indicator. The indicator may be used as an auxiliary for a trending market and just after interpretation divergence/convergence configurations should be applied.
When comparing the Demarker with RSI, the first one is solid and simple in use for most of the traders. There is no denying the fact that if you re using one of the both mentioned above, you should not worry about the other indicator. Also, it should be kept in mind that you should not use both the indicators in the same present scenario. Using one of the indicators solely depends on availability.