How to Use the DeMarker Indicator in Day Trading

How to Use the DeMarker Indicator in Day Trading

Reading time: 8 minutes

Traders are constantly looking for an edge, an extra bit of information to help forecast where the market might head next. Technical indicators, like the DeMarker Indicator, are tools designed to aid in this pursuit.

Often referred to as the ‘DeMark’ Indicator or even just ‘DeM’, the DeMarker Indicator is a vital tool designed by Thomas Demark to aid market timing across various financial instruments and timeframes. The Indicator is ideal for longer-term and medium-term trading styles, such as swing trading and position trading, as well as shorter-term trading styles, like scalping and day trading (where open positions are generally liquidated by the day’s close). 

The indicator compares a security’s price highs and lows over a given period. This helps identify overbought (or overvalued) and oversold (or undervalued) market conditions and offers insights into trend direction/strength. As a result, this technical indicator may help complement your current trading strategies.

How Do You Apply the Demarker Indicator on MT4?

Applying the DeMarker Indicator on MT4 is straightforward and can be achieved in three steps:

Step 1:

Open the MetaTrader (MT4) platform. 

Click ‘Insert’ and select ‘Indicators’ for your chosen security. The example below is the 5-minute EUR/USD currency pair.

FP Markets MetaTrader 4 (MT4)

Step 2:

Select ‘Oscillators’ and then choose ‘DeMarker’.

FP Markets MetaTrader 4 (MT4)

Step 3:

If you want to work with the default settings, you can simply click ‘OK’ at this step. 

However, at this point, you can also change the indicator's settings to suit your preferences, altering parameters, colours and timeframes on which the indicator is visible. After clicking OK, the indicator will apply to the bottom pane of your chart, as shown below on the 5-minute chart of the EUR/USD.

FP Markets MetaTrader 4 (MT4)

The DeMarker Indicator Structure

The DeMarker Indicator is an oscillator with values between 1 and 0. The indicator assigns overbought and oversold lines at 0.7 (or 70) and 0.3 (or 30), respectively. You can think of these thresholds as warning signs in which a market could be temporarily overheating, either to the upside or downside. 

Like most oscillators, an overbought or oversold signal does not necessarily mean that price action will reverse. The indicator can remain overbought or oversold for prolonged periods in trending environments. The example below on the EUR/USD 15-minute chart reveals the indicator recently recorded overbought conditions.

The DeMarker Indicator offers some room for customisation to better suit your trading preferences, which can be applied in step 3 above. The most common configurable element is the indicator's period. The default setting is usually 14 periods, but you can adjust it based on your trading style. If you're a day trader or prefer to capitalise on short-term fluctuations, consider using a lower period (between 6 and 9) for a more responsive indicator. However, these are just general guidelines. The DeMarker Indicator is most effective when used in conjunction with other technical indicators and price action analysis.

FP Markets MetaTrader 4 (MT4)

Formula:

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

Unlike the Relative Strength Index (or RSI), which focuses on closing prices over a given period, the DeMarker Indicator looks at highs and lows. Fortunately, for those not mathematically inclined, which is the majority of us, all major trading platforms will do the heavy lifting for you and calculate the indicator. 

The DeMarker Indicator relies on two intermediate values: DeMMax and DeMMin. These capture the upward and downward price movements over a specific period:

• DeMMax: This signifies the difference between the highest price (High) of the current period and the highest price of the previous period. If the current high is lower than or equal to the previous high, DeMMax is set to 0.
• DeMMin: This signifies the difference between the lowest price (Low) of the previous period and the lowest price of the current period. If the current low is higher than or equal to the previous low, DeMMin is set to 0.

How Day Traders Use the DeMarker Indicator?

We have already discussed the use of overbought and oversold levels beyond 0.7 and 0.3, respectively, though there are several other ways a day trader can use this indicator, such as divergences.

As with many technical oscillators, the DeMarker Indicator helps identify when the price and the indicator are not converging, which presents a potential trading opportunity.

As shown in the 5-minute EUR/USD chart below, although price action continued to form a lower low on 11 July, the indicator did not replicate this behaviour, forming a higher low and telling traders that the lower low formed in price may be feeble, which can present a buying opportunity. This is referred to as a positive divergence and is a bullish signal. Nevertheless, it must be stressed that taking a trade based on a divergence signal alone is unlikely to yield long-term positive results. Professional day traders tend to combine the indicator’s signals with other technical tools. For example, if we imagine positive divergence formed at support or trendline support, this would help add weight to a possible bullish reversal. 

FP Markets MetaTrader 4 (MT4)

Like all technical indicators, however, there will be times when divergences fail to accurately signal a reversal in price action. Below are two instances of negative divergences failing to produce much of a bearish reaction.

FP Markets MetaTrader 4 (MT4)

DeMarker Indicator FAQs:

1. What is the DeMarker Indicator?

The DeMarker Indicator is a tool technical analysts use to help with market timing, identify overbought/oversold signals and recognise divergences. 

2. How is the DeMarker Indicator calculated?

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

3. Can I use the DeMarker Indicator as a standalone trading indicator?

Like all technical indicators, the DeMarker Indicator is seldom used in isolation and instead confirmed with additional technical tools, such as price action analysis (support and resistance, for example) and other technical indicators.

4. Can I use the DeMarker Indicator with FP Markets?

Yes, the DeMarker Indicator is available on all our trading platforms, including MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader and TradingView. 

With an understanding of how the indicator functions, consider opening a trading account with FP Markets and applying your new-found knowledge to the financial markets.