The DeMarker (DeM) Indicator: Strategies & Validity

The DeMarker Indicator is a lesser-known but potent tool in the trader’s toolbox. If you’re seeking to enhance your technical analysis, you’ll want to understand what the DeMarker Indicator is, how it’s calculated, how it can be used in strategy and what its limitations are.

What is the DeMarker Indicator?

The DeMarker Indicator (often abbreviated as DeM) is an oscillator-type technical analysis indicator designed to compare recent price highs and lows with the prior period’s extremes to assess potential market demand exhaustion and signal possible trend reversals or price turning points.

Unlike many oscillators that rely on closing prices (for example, the Relative Strength Index (RSI)), the DeMarker uses intra‐period highs and lows (current vs previous) as its core data.

In practice, when the DeMarker line rises above a certain threshold (commonly 0.70) it may signal overbought conditions; when it falls below a lower threshold (commonly 0.30) it may signal oversold conditions.

Thus, from a beginner’s perspective, the DeMarker is a tool that attempts to highlight when a market might be “running out of steam” in one direction and preparing to turn.

Origins and Background

The DeMarker Indicator was developed by famed trader and technical analyst Thomas DeMark (sometimes styled Tom DeMark). His work over many decades sought to identify inflection points in markets — essentially the “when” of buying low and selling high, rather than just the “what” or “why”.

DeMark’s suite of indicators (of which DeMarker is one), are used across asset classes, across timeframes, and marketed as tools that can assist with timing entries and exits.

From a historical perspective, what’s important is that the DeMarker is not brand-new; it has been discussed in technical analysis literature for years and has seen use in Forex, commodities, stocks, and futures. For example, the source from Investopedia dates the DeMarker summary to 2005.

How the DeMarker Indicator Is Calculated

Understanding the calculation helps you know the logic behind the indicator, and why its signals might (or might not) work. Here’s a breakdown of the formula and logic.

Basic Logic

• The DeMarker Indicator measures the difference between the current period’s high and the previous period’s high, and similarly the difference between the current period’s low and the previous period’s low.
• If the current high is greater than the previous high, that difference is labelled “DeMax”.
• If the current low is lower than the previous low, the difference (previous low minus current low) is labelled “DeMin”.
• If neither condition is met, the difference is considered zero (so negative values are treated as zero in the formula) to avoid skewed results.

Formula

One commonly cited version (when using a 0-1 scale) is:

DeM = SMA(DeMax, N) / [ SMA(DeMax, N) + SMA(DeMin, N) ]

Where:

• SMA = Simple Moving Average
• N = number of periods (commonly 14)

Another version expressed in percentage (0-100) uses effectively the same logic but multiplies by 100.

Interpretation of the Range

• The oscillator typically lies between 0 and 1 (or equivalently 0 and 100 if scaled).
• A value close to 1 (or 100) means recent highs are much higher than previous highs, relative to lows — suggesting potential overbought conditions / exhaustion of buying pressure.
• A value close to 0 suggests recent lows are much lower than previous lows, relative to highs — suggesting potential oversold conditions / exhaustion of selling pressure.

Example Calculation (Simplified)

Suppose you have the following (hypothetical) data:

• Previous high = 50
• Current high = 52 → DeMax = 2
• Previous low = 48
• Current low = 47 → DeMin = 1

If you apply an SMA over N periods and sum them appropriately, you’d get your DeM value accordingly. The key is that DeMax is increasing when highs are rising, and DeMin is increasing when lows are falling — it provides a relative view of “how much price is moving up vs down”.

Interpretations of the DeMarker Indicator

Now that you know how it’s calculated, let’s explore how traders interpret the DeMarker Indicator in the real world.

Overbought / Oversold Zones

• When the DeMarker value rises above about 0.70 (or 70% when scaled), it typically indicates that the market may be overbought and a price pullback or reversal could be near.
• When the value falls below about 0.30 (or 30%), it typically indicates that the market may be oversold and a price rebound could be nearing.
• Values between ~0.30 and ~0.70 are often viewed as non-extreme — less likely to produce reversal signals and more likely to represent “normal” trending conditions.

Divergences

A powerful feature of the DeMarker is divergence interpretation. Divergence occurs when price action is moving in one direction, but the indicator is moving in another (or is failing to confirm price extremes). For example:

• Price makes a new high, but DeMarker does not (a lower high on the indicator) → bearish divergence → potential reversal downward.
• Price makes a new low, but DeMarker does not (a higher low on the indicator) → bullish divergence → potential reversal upward.

Trend Pause / Exhaustion Signals

Beyond classic overbought/oversold, the DeMarker can suggest when the trend may be losing momentum. For instance:

• In a strong uptrend, a DeMarker value that fails to make higher highs while price does may indicate a waning of momentum.
• In a strong downtrend, a DeMarker value that fails to make lower lows while price does may suggest sellers are becoming exhausted.

Best Market Conditions

Interpretation guides often caution: the DeMarker works best in certain conditions and less well in others. For example:

• When the market is range-bound (sideways), oscillators like DeMarker can give more reliable signals of reversal because extremes are more defined.
• In strong trending markets, oscillators may remain in the extreme zone for long periods or may mis-signal as the trend persists. Thus one must be cautious.

Key Signals and What They Mean

Here are the main signals a trader looks for when using the DeMarker Indicator:

Crossing Extremes

• Buy signal: DeMarker falls below the lower threshold (e.g., 0.30) and then rises back into the range → suggests oversold condition and potential upward reversal.
• Sell signal: DeMarker rises above the upper threshold (e.g., 0.70) and then falls back → suggests overbought condition and possible downward reversal.

Divergence Signals

• Bullish divergence: Price makes a lower low but the DeMarker makes a higher low → suggests a potential upward reversal.
• Bearish divergence: Price makes a higher high but the DeMarker makes a lower high → suggests a potential downward reversal.

Breakouts of Indicator Trendlines

Some traders draw trendlines on the DeMarker oscillator itself (for example connecting highs or lows of the indicator) and interpret a breakout of that trendline as a signal.

Contextual Signals

• The DeMarker may signal better when combined with volatility contraction (i.e., price ranges narrowing) or when other indicators align (for example momentum indicators, trend filters).
• A signal from the DeMarker without context may be weaker or riskier.

Example Scenario

Suppose you are looking at a currency pair on a daily chart. The DeMarker falls to ~0.25 (below 0.30). Price action shows a recent low. The next day, the DeMarker rises above 0.30 again. At the same time you spot a bullish candlestick pattern or rising trendline support. That would be a buy-signal scenario using DeMarker as the trigger.

Trading Strategies Using the DeMarker Indicator

Let’s explore how one might incorporate the DeMarker Indicator into real trading strategies. Remember: no indicator guarantees success. Good risk management and confirmation are critical.

Overbought/Oversold Reversal Strategy

Setup:

• Timeframe: any (but longer timeframes may reduce noise).
• Indicator: DeMarker set to default periods (e.g., 14) initially.
• Entry rules:
  • For a long trade: Wait for DeMarker to dip below ~0.30, then rise back above it (signal). Enter long.
  • For a short trade: Wait for DeMarker to rise above ~0.70, then fall back below it. Enter short.
• Stop-Loss: Just beyond recent swing low (for long) or high (for short).
• Take-Profit: Could target next major support/resistance or use a risk-reward ratio (e.g., 1:2 or 1:3).
  Considerations:
• Ensure price is not in a strong trend where oscillators simply ride extremes.
• Combine with candlestick confirmation or trend-filter (e.g., moving average).
  Example Ruleset from a Broker Source:
  The broker FBS suggests using DeMarker together with the Parabolic SAR: For long: DeMarker line crosses its lower threshold and Parabolic SAR starts rising. For short: DeMarker crosses upper threshold and Parabolic SAR turns down.

Divergence Strategy

Divergence can provide higher‐probability reversal signals, but also may come with more waiting time and risk of early entry.
Setup:

• Monitor price highs/lows and compare to DeMarker highs/lows.
• Bullish divergence: Price makes a lower low, DeMarker makes a higher low → look for long entry.
• Bearish divergence: Price makes a higher high, DeMarker makes a lower high → look for short entry.
• Entry: Wait for confirmation (e.g., price breaks a minor swing high/low, candlestick reversal).
• Stop-Loss: Recent swing low (for long) or swing high (for short).
• Take-Profit: May aim for a measured move or recent structure level.
  Notes:
• Divergences may take time to play out.
• Risk of “false divergence” if price continues trending strongly regardless of indicator.
• Best used when volatility contracts or other filters suggest exhaustion of trend.

Trend-Filter Strategy

Since oscillators like DeMarker are less reliable in strong trending markets, one strategy is to filter for market condition before applying DeMarker signals.
Setup:

• Use a trend-filter: e.g., 200-period moving average (MA) or ADX (average directional index) to determine trend strength.
• If MA indicates uptrend (price above MA), then limit signals to bullish ones (from DeMarker).
• If MA indicates downtrend, limit to bearish signals.
• Use DeMarker as a trigger for entries within that trend context (rather than counter-trend).
  Example:
• Uptrend: Price above 200-MA. Wait for DeMarker to dip below ~0.30 and turn up → possible long entry.
• Downtrend: Price below 200-MA. Wait for DeMarker to rise above ~0.70 and turn down → possible short entry.
  This approach helps avoid “buying oversold” in a market that is simply trending down, or “selling overbought” in a market that is trending up.

Setting the Indicator: Parameters and Considerations

Default Periods

• The default look-back period for the DeMarker is commonly 14 periods (days for daily chart, hours for hourly, etc).
• Some traders use 13 or 14.

Threshold Levels

• Standard thresholds: ~0.70 (70%) for overbought, ~0.30 (30%) for oversold.
• Some markets/traders adjust to 0.80/0.20 for volatile instruments.

Timeframe Choice

• The indicator is applicable on any timeframe (minutes, hours, days) provided the trader uses consistent logic.
• Shorter timeframes increase noise (more false signals); longer timeframes may reduce signals but increase reliability.

Customisation and Backtesting

• It’s recommended to backtest the indicator with your chosen market/timeframe to identify which parameters work best.
• Consider modifying period length (e.g., 10, 20) or adjusting thresholds for specific asset behaviour.
• Some traders also carry a dual-setting approach: one “fast” setting for short-term entries, one “slow” for trend-context filtering.

Colour/Display Settings

• On most platforms (e.g., MT4/MT5), you can set the DeMarker indicator line, colours, threshold lines (30, 70) and smoothing style.
• Often, the indicator window shows just the line oscillating between 0 and 1 (or 0-100).

Strengths of the DeMarker Indicator

Here are some of the advantages of using the DeMarker Indicator:

• Unique formula: Because it uses highs and lows (rather than just closes), it provides a slightly different perspective than many oscillators.
• Simplicity: It’s relatively straightforward to calculate and interpret, particularly for the overbought/oversold use case.
• Early signal potential: In some cases, it may signal trend exhaustion or reversal ahead of price events, offering a leading rather than solely lagging insight.
• Versatility: It can be applied across asset classes (Forex, stocks, commodities) and multiple timeframes.
• Works in range-bound markets: In markets where price is oscillating rather than trending strongly, the DeMarker may provide more reliable reversal signals.

Weaknesses & Limitations

No indicator is perfect. The DeMarker Indicator has several important limitations and potential pitfalls:

• False signals in strong trends: When a market is in a strong trend (especially trending up or down without clear exhaustion), the DeMarker may stay in extreme zones or give reversal signals that don’t materialise.
• Limited stand-alone reliability: Research (e.g., cited by Investopedia) suggests that when used in isolation, DeMarker often has limited predictive power and may underperform a simple buy-and-hold in some cases.
• Parameter sensitivity: If period length or thresholds aren’t adapted to a given market/timeframe, the indicator may give too many or too few signals.
• Lag and smoothing trade-off: With longer periods the indicator becomes smoother (fewer false signals) but may lag; with shorter periods it becomes more responsive but may produce more noise.
• Requires confirmation: Because of the above limitations, the DeMarker should not be used in isolation. It works best when combined with other tools, filters or confirmations.

How to Combine the DeMarker Indicator with Other Tools

Combining the DeMarker Indicator with additional technical tools increases your chances of getting quality signals and filtering out weak ones. Here are some common combinations:

Trend-Filter Indicator

Use something like:

• Moving Average (e.g., 200-period MA)
• ADX (Average Directional Index) to detect trend strength
• Price structure (higher highs/lows, lower highs/lows)

This helps you decide whether to use DeMarker signals in alignment with the trend (safer) or counter-trend (riskier).

Momentum or Volume Indicators

Combine with indicators such as:

• RSI (Relative Strength Index)
• MACD (Moving Average Convergence Divergence)
• Volume spikes / On-Balance Volume

For example: if DeMarker signals oversold and RSI is also below 30 and volume shows accumulation, this may increase the probability of a reversal.

Candlestick Patterns and Price Action

Never underestimate the value of basic price-action confirmation:

• Reversal candle (hammer, shooting star) near support/resistance
• Break of trendline
• Chart patterns (double bottom, head & shoulders)

If DeMarker signals coincidently with price-action cues, that adds confidence.

Support and Resistance Levels

Let key horizontal levels guide entry and exit decisions. For example:

• DeMarker shows oversold. Price is near a strong support level. Enter long.
• DeMarker shows overbought. Price is near a major resistance level. Consider short or exit.

Risk Management and Position Sizing

No matter how strong a signal, risk control is paramount:

• Use stop-loss orders.
• Position size according to risk tolerance (e.g., 1-2% of account per trade).
• Consider reward-to-risk ratio (e.g., target 2:1 or better).
• Avoid “betting” too large on an oscillator signal alone.

Practical Tips for Implementation

Here are some best-practice tips when using the DeMarker Indicator in your trading:

• Backtest first: Use historical data on your preferred asset/timeframe to see how DeMarker performed (customise period/thresholds).
• Use a demo account: Before committing real capital, try trades based on DeMarker signals in a realistic environment.
• Be aware of market context: Is the market trending or ranging? DeMarker signals fare differently in these conditions.
• Adjust settings: The “default” (14 periods, 0.3/0.7 thresholds) may not be optimal for your instrument. Try different values and compare.
• Use timeframe consistency: If you trade daily charts, stick with daily DeMarker. If intraday, use shorter timeframe but accept more noise.
• Don’t ignore the bigger picture: Put DeMarker signals in the context of higher timeframe trends and market fundamentals.
• Manage risk: Always place stop-loss orders, define your exit strategy, set realistic profit targets.
• Keep trading journal: Track when DeMarker signals led to winning trades vs losing trades. Note conditions (trend, volatility, volume) for each.
• Be patient: Good DeMarker reversal signals may take time to play out. Avoid jumping in too early.
• Stay disciplined: If DeMarker gives a signal but your other filters (trend, price action) don’t align, you may choose to skip the setup.

Frequently Asked Questions (FAQs) About DeMarker Indicator

The Bottom Line

The DeMarker Indicator is a robust tool for traders who wish to add another dimension to their technical analysis. By comparing recent highs and lows to the previous period’s extremes, it offers unique insights into potential market exhaustion and reversal points.

Key takeaways:

• The DeMarker compares current highs/lows versus prior highs/lows and produces values between 0 and 1 (or 0-100).
• Typical thresholds: ~0.30 for oversold, ~0.70 for overbought.
• Useful signals include overbought/oversold crossings, divergences, and trend-exhaustion cues.
• Works best when combined with other tools: trend filters, price action, momentum indicators, support/resistance.
• Not perfect: false signals, especially in strong trends; requires context, risk control, and patience.
• Backtesting, demo practice, parameter tuning and disciplined risk management are essential for success.

In your trading toolkit, the DeMarker Indicator can serve as a valuable alert system — flagging when momentum may be waning, the trend may be exposing vulnerabilities, or when a reversal may be gaining strength. Used wisely and in context, it can enhance your decision-making. But like any tool, it does not replace your trading plan, market understanding or risk discipline.

If you’re serious about integrating the DeMarker into your strategy, I recommend: choose a market you trade regularly, backtest multiple settings across historical data, record your results, then proceed with live or demo trading with small size until confident.

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