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If you want to gauge whether an asset might be overbought or oversold while trading Forex, one tool you can use is the DeMarker indicator. This indicator also is sometimes called the "DeMark" indicator or simply "DeM." The name can also be stylized "DeMARK."
This 101 guide will explain exactly what the DeMarker indicator is, how it is calculated, and how to plot it on your charts and use it in your FX trading strategies.
The DeMarker indicator is an oscillator. It was developed by the famous professional market predictor Thomas DeMark.
You can find a few different versions of this indicator:
Calculating the indicator involves a comparison between the highest and lowest prices for the current period versus the highest and lowest prices for the previous period.
The resulting line helps you visualize directional bias as well as overbought and oversold conditions.
Key point: The DeMarker indicator compares minimum prices and maximum prices for the current period to the minimum prices and maximum prices for the previous period to create an oscillating line that helps you visualize directional bias.
The calculation for the DeMarker indicator is fairly complex to explain. Here is the formula:
In order to make any sense out of this formula, you need to know what each of the components are.
DeMMAX is a value derived from comparing the maximum value for the current bar to the maximum value of the previous bar over "n" periods.
If the previous high is higher than the current high, the value is "0."
Otherwise, the value is the difference between them.
DeMMIN is a value derived from comparing the minimum value for the current bar to the minimum value of the previous bar over "n" periods.
If the previous low is lower than the current low, the value is "0."
Otherwise, the value is the difference between them.
SMA refers to a simple moving average, and is used in MT4's calculations for this indicator.
Thankfully, you do not need to memorize or even fully understand this math. Your software will take care of the calculations for you.
Key point: Calculating the DeMarker indicator involves a formula that assigns values based on comparisons between the past and current periods. You do not need to do these calculations yourself.
When you plot this indicator on your Forex chart, you will notice that it includes a pair of dotted lines at 0.70 and 0.30.
When the oscillating line passes above 0.70, that is an indication that the market conditions may be overbought. When the oscillating line passes below 0.30, that is an indication that the conditions may be oversold.
Key point: You can rapidly identify potentially overbought or oversold conditions by checking whether the oscillating line in the DeMarker indicator has passed above or below either of the dotted horizontal lines.
It is fast and easy to set up the DeM in MT4. Use the following steps.
Key point: You can set up the DeMarker indicator in your charts in MT4 with a few quick clicks.
The simplest way to use the DeMarker indicator is to spot potential reversals. This can play out in either of two ways:
Some people like to exit around 0.50, while others may try to ride out trends.
Sometimes, you also will spot divergences between price and the oscillator. This can also result in bullish and bearish setups:
Key point: You can look to buy or sell based on when the DeMarker indicator enters and exits the overbought and oversold zones, or based on divergences between the indicator and price.
Key point: As with any other indicator, you need to experiment and test to come up with the most effective ways to use the DeM.
The DeM can help you spot reversals in Forex. Whether you are keeping an eye on the overbought and oversold zones or looking for divergences, the DeMarker indicator can help you identify setups where price might reverse.
While you may spot setups using nothing but the DeM, it is most powerful and reliable when used in conjunction with other indicators or price action.
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