DeMarker Indicator: Better Than RSI?

The DeMarker indicator is an oscillator that estimates overbought and oversold conditions by relating resenting price action to recently closed prices.

As an oscillator, it fluctuates between the values of 0 and 1, or in some cases 0 to 100, and is calculated over a predetermined period. It is therefore similar to the Relative Strength Index (RSI) indicator as it identifies potentially overbought and oversold conditions.

Unlike the RSI however, which is calculated based on closing prices, the DeMarker indicator can be calculated based on opening, high or low prices as well.

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The default period value for this indicator is 14, but if you want it to be more sensitive you may want to change the value to 8.

The DeMarker formula uses the following two terms:

DeMax = High - Previous High (only if > 0)

= 0 otherwise

DeMin = Previous Low - Low (only if > 0)

= 0 otherwise

The moving averages of these two terms are then brought together to derive the DeMarker indicator value:

DeMarker indicator = MA of DeMax / (MA of DeMax + MA of DeMin)

*MA = moving average

The most notable thing about this formula is that it considers the relative positions of both the price highs and price lows. This is significantly different from the RSI formula that considers only the average gain and the average loss.

The effect of this is that the DeMarker tends to be more jagged and volatile than the RSI line.

demarker vs rsi

In the chart above, notice how the DeMarker line tends to be more volatile than the RSI line, as it crosses the overbought and oversold boundaries more often than the RSI.

DeMarker Indicator Interpretation

Like all oscillators, the DeMarker indicator is generally used to identify oversold and overbought market conditions.

When the indicator line moves above 0.7 or 70, this suggests the market is overbought and that a downward correction is imminent. Conversely, when the DeMarker line moves below 0.3 or 30, it suggests that the market might be oversold.

Generally speaking, when the market is considered to be oversold, traders will look initiate buy trades and/or close their profitable sell trades. Likewise, when the market is overbought, traders will look for sell entries and/or close their profitable buy trades.

Furthermore, you can also use the DeMarker indicator to identify and trade divergences.

For example, if the price is making higher highs but the DeMarker index is making lower highs, this is known as regular bearish divergence and you should look to be selling the currency pair.

Regular bearish divergence identified using the DeMarker indicator is illustrated below.

DeMarker Indicator Interpretation

In the middle of this 4-hour chart, the EUR/USD made higher highs in price but lower highs in the DeMarker oscillator.

Once the lower peak left the overbought zone and went back below the 0.7 mark, you should have entered a short position at 1.1357.

The EUR/USD then broke downwards and hit a low of 1.1105 as the DeMarker line moved into the oversold region. If you closed your trade then, you would have walked away with a cool 170 pips.

Quirks of the DeMarker Indicator

Quirks of the DeMarker Indicator

The thing to remember when using the DeMarker indicator, is that due to how it’s calculated (and the way it moves), this indicator is best suited for short-term range trading methods.

If you’re a longer-term trend trader, the DeMarker indicator is likely to only be useful as a buy entry indicator. Due to the way its calculated, it tends to identify oversold conditions in an uptrend more accurately (and more often) than it’s able to identify overbought conditions in a downtrend.

Quirks of the DeMarker Indicator

Here’s what I mean:

In the above chart, notice how the DeMarker is generally able to pick accurate buy entries on an uptrend.

But if we look at a downtrending market however…

… the DeMarker indicator would have missed out of most of the potential sell entries.

This is a quirk that results from the indicator’s formula.

Best Uses Of The DeMarker Indicator

The DeMarker shares the same strengths and weaknesses as all other oscillator indicators: while it’s reliable at identifying price range extremes, it’s weak at picking out trend reversals.

So there are only 2 things this indicator is good at:

  • Generating buy/sell signals in a ranging market
  • Generating buy signals in an uptrend

Note though, that a strong market trend will cause the DeMarker line to persistently stay in overbought/oversold levels, rendering the indicator all but useless in those situations.

So What Do You Think?

What do you think about the DeMarker indicator? Let me know your thoughts in the comments section below.

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