Definition and Overview
The Demarker Indicator is a technical analysis tool developed by Tom Demarker for identifying high-risk buying or selling areas in a given market. It is a technical indicator that attempts to measure the demand of an asset by comparing the high and low prices with the previous high/low prices.
It is composed of two others indicators which are DeMax and DeMin. The first compares the current bar high with the previous bar high while the second compares the current bar low with the previous bar low.
These two indicators moving average are then assembled to create the DeMarker indicator.
The period using to calculate the moving averages discussed previously is the DeMarker indicator input, and this is the only one this function accepts.
The indicator is bounded between -100 and +100, and is subject to different interpretation. But generally, it is considered as an overbought/oversold indicator, so when the DeMarker value rises above a certain level (70 for example, but it depend on the period you set), it is considered as bearish signal, while a fall below a certain level (30, also depends on the period), it is considered as bullish signal.
Algorithm
Prediction Algorithm:
1. Calculate DeMax (i): If HIGH(i) > HIGH(i � 1), then DeMax(i) = HIGH(i) � HIGH(i � 1), else DeMax(i) = 0
2. Calculate DeMin (i) If LOW(i) < LOW(i - 1), then DeMin(i) = LOW(i - 1) - LOW(i), else DeMin(i) = 0
3. Calculate DeMarker indicator : DMark (i) = SMA (DeMax, N) / (SMA (DeMax, N) + SMA (DeMin, N))
4. If DMark<30, predict BUY ElseIf DMark>70, Predict SELL
Where:
HIGH (i) � current maximum price;
LOW (i) � current minimum price;
HIGH (i � 1) � previous maximum price;
LOW (i � 1) � previous minimum price;
SMA � simple moving average;
N � number of periods used in the calculation
HIGH (i) � current maximum price;
LOW (i) � current minimum price;
HIGH (i � 1) � previous maximum price;
LOW (i � 1) � previous minimum price;
SMA � simple moving average;
N � number of periods used in the calculation
Limitations
DeMarker oscillator works in a very similar way to RSI, Stochastic and other overbought/oversold oscillators, oscillating between -100 and 100. Main drawbacks of DeMarker are the same of other oscillators: usually works fine in sideways markets or in slow trending markets but it is not able to deal with strong vertical trends.
Trading with the Demarker Indicator
DeMarker Indicator is an oscillator, and it is possible to use with it all the common techniques that are applied to oscillators. The oversold and oversold levels of the indicator are at 0.3, and 0.7, respectively. When the oversold value is exceeded, the expectation is that the prices may soon stop falling. In the opposite case, we anticipate that the uptrend will run out of steam in a short time.
If you remember how the RSI is constructed, you will note that the formulation of the demarker indicator is almost the same as that of the RSI with the difference being that the RSI most often uses an exponential moving average, while the demarker indicator uses the simple moving average of the prices. But on the whole, both indicators compute the same formulae for the min-max values, and interpret them in very similar ways.
In short, it is fair to say that one will never need to create technical strategy where both the Demarker and RSI indicators are necessary. They are both oscillators, but beyond that, the great similarity between the two indicators means that using one will always grant us all the information that can be derived from the other.
The indicator is most suitable to a ranging market. If it is used in trending markets, it must be used as an auxiliary to a trend indicator, and divergence/convergence configurations must be sought out for its interpretation.
Conclusion
The Demarker indicator is a solid, simple and reliable oscillator in general, and can be used as a substitute for the RSI when the trader chooses to do so. It doesn't possess any great qualities distinguishing it from the latter, however, so there is no point in creating a combination of the two in just about any conceivable scenario. Arguably, the decision to use any of these two indicators will depend on availability. It is a good idea to use one when it is available and not to worry too much about the other.
Sources and Additional Information:
No comments:
Post a Comment