The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)
In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to act and begin your journey by completing the Trader’s Scorecard (http://www.traderspendulum.com) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.
The DeMarker indicator compares the most recent price action to the previous period’s price in an attempt to measure the demand of the underlying asset. Generally used to identify price exhaustion and market tops/ bottoms.
The DeMarker indicator is a momentum oscillator, similar to the RSI and many others available today. The DeMarker scale is between 0 and 100, typically measuring overbought above 70 and oversold below 30. In this article, we will explain how to use this indicator during trends and sideways markets.
DeMarker measures the demand for the market by comparing recent price action to previously closed price to gauge the underlying trend strength. As with the RSI, it is less prone to distortions, and presents as a fairly smoothed curve below price.
DeMarker Calculation for time “t”:
DeMax(t) = High(t) – High(t-1) if High(t) > High(t-1); if not, DeMax(t)=0
DeMin(t) = Low(t-1) – Low(t) if Low(t) < Low(t-1); if not, DeMin(t)=0
DeMarker(t) = SMA (DeMax, N)/ (SMA (DeMax, N) + SMA (DeMin, N)), where
High(t) = highest price of current period
Low(t) = lowest price of current period
High(t-1) = highest price of previous period
Low(t-1) = lowest price of previous period
N = number of periods (14 is standard in the calculation)
Using shorter time spans than 14 periods will create greater volatility and establish more overbought and oversold conditions. Longer time periods will produce fewer signals.
USING THE TOOL
TRENDS: The first step is to look for signs that a market is trending or about to trend. This can be done by looking at the fundamentals and focusing on markets that are starting to move. Create a watch list. After deciding that a stock sector, currency grouping or commodity is about to trend, then use the DeMarker indicator to join the trend.
In the USD/JPY Daily Chart above, look at the trend on the left. Look to go long when the DeMarker indicator dips below 40 (one can use 30 as well). In the example above, the indicator dips below 40 and back above right at the start of the trend, and never dips below 40 again on this time frame. Moving to the 4-hour chart as seen below, there are other opportunities to join the trend with the DeMarker dipping below 40 and turning back up again. Use the indicator in conjunction with trend lines and channels and as long as price remains in the upward sloping channel, look for buys on dips.
SIDEWAYS MARKETS: When a market is rangebound, as in the USD/JPY Daily Chart after the initial trend move, the DeMarker oscillator is a good tool to use to signal buy and sell signals when the market is overbought and oversold. Look for oscillator divergences at market tops and bottoms during sideways markets to trigger a change in trend. 123 reversals on a smaller time frame are also good confirmations with this reversal signal during sideways markets. These signals work on all time frames, but I like to do a top down approach and use the larger time frame for the context, and the smaller time frame for trade entry. In this example, the Daily would provide the context for the trend move and the 4-hour would provide the entries using the DeMarker indicator.
Learn how the DeMarker indicator helps put traders in the trend as it is progressing, as a breakout strategy. Start incorporating the DeMarker indicator into your chart set-up. Finally, use the DeMarker indicator in developing trading strategies with other indicators.
See you next week with another “D” indicator!
If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.
I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.
The Trader’s Pendulum: The 10 Habits of Highly Successful Traders. Copyright (c) 2015 by Jody Samuels. This book is available at all bookstores, online booksellers, and from the Wiley web site.