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Demark Indicator

Demarker Indicator is an oscillator ranging from 0 to 100. The value shows the trend’s direction as well as points to overbought (70) and oversold (30) levels. This technical instrument is used to determine sustainable trends in the binary options trading, find possible reversal levels and show entry and exit points. The main advantage of the oscillator is that it can be used for buying both call and put options wherever the current trend is headed. It is also good for frequent trading cycles with short-term expirations of binary options. The trading strategy based on this tool is effective, reliable and profitable.
This article is aimed to explain several mechanisms of the indicator and show the details of its practical application in trading.

What is the Demark Indicators?


Tom Demark Indicators (also known as DeM) is a usual oscillator with all traditional strengths and weaknesses. Having a mathematical formula based on smoothing of the simple moving average, the oscillator is quite sensitive, which allows using it on ultra-short timeframes such as 5-, 10- and 15-minutes. It is used alone and in combinations with other technical indicators. The main power is that it points to fast-changing market conditions in range-bound choppy price action. When the current trend is strong, support or resistance levels of the indicator value are shifted, which helps traders to add volume in profitable deals during retracements. It also has bullish and bearish divergences, pointing to a potential reversal of the trend’s direction.

Most of the traditional technical indicators use close price in their formulas. For example, the Relative Strength Index, probably the most well-known oscillator, is based on comparing close rates in the previous period with a so-called average true range. RSI also smoothes the value with an exponential moving average to get the maximum result. However, Demarker Indicator use high and low to compare the momentum and identify the trend’s direction. The detailed mathematical formula will be explained below, while this section of the article concentrates on practical application.

Demark Trendline Trade Signals


This parameter can be adjusted by a trader. However, traditional level when the market is considered overbought is 70. It could be shifted to 80 to lower the number of trading signals and filter the noise. But this option is getting more effective when binary options traders focus on more volatile assets. The main goal of the level is to show the moment when the recent trend is getting exhausted and a reversal is possible. At the same time, it’s important to keep an eye on moments when Demark indicators crosses the overbought level from below to buy more call options, and from above when the attractiveness of put options is getting higher.

For the bear market conditions, the oversold level is crucial. It’s counted as 30 as the default setting, and it also can be shifted to either side. Sometimes traders use 20 for the oversold threshold when the market is in a sharp downside rally. The meaning of the oversold level is the same as per overbought with mirrored trading conditions. So, for instance, if the oscillator is getting out of the oversold territory, crossing the line from below, the bullish reversal is likely. Thus, it’s worth buying CALL options. Otherwise, when the De marker drops below the line, PUT options could be more profitable.

Demark Indicator

If you like this strategy, you might also be interested in this Options Sniper Strategy

Bullish and Bearish Divergence


The main practical advantage of the divergence pattern is that it shows when the current trend is gone too far in terms of average rates. For example, if the price chart draws a sequence of higher highs in the uptrend, while Demark Indicator prints lower highs, then the divergence is in play. In this case, the likelihood of the bullish continuation is getting lower, while the reversal is getting more probable. Therefore, counter-trend deals might be lucrative. This divergence is called bearish as it points to the downside bounce.

The bullish divergence on the DeM oscillator occurs when it draws the sequence of higher lows at the same time with the quote charting lower lows. So, although the downtrend continues, buying call options (counter-trend deals) is getting more attractive. Divergences are quite rare but effective in terms of profitable signals.

Demark Indicator

The middle line


The level of 50 (or 0.50 in some variations) is important in determining the trend’s direction. Tom Demark indicators (TD, the inventor) are good in showing where the market is intended to head in the future. If the oscillator is continuously above the middle line, then the bullish momentum is strong. Thus, call options are in demand. On the other hand, when the indicator's value is hovering below 50, the underlying asset is keen on declining. This phase is called bearish and put options are reasonable. In the same way as per overbought and oversold lines, the middle threshold has to be monitored in the scope of the crossing. The moment when DeM oscillator crosses the line usually works as a trigger to accelerate the recent rally of the asset price. The middle line can also act as support or resistance during strong trends.

Demark Indicator

How to use Tom Demark Indicators?


In the binary options type of trading, periods of one-way action matter. The main reason is that traders can easily maximize their profits from trading in the financial markets by simply clicking the same button. In other words, buying CALL options when the uptrend accelerates, and candlesticks appear in the same colour for quite a while, is much more profitable than opening one long-term deal. That’s the case when Tom Demark might help. The method is based on analysing the market conditions on a larger timeframe like one day, while the trading cycle is executed on a shorter chart like one hour.

There are several examples below.

Buying call options for GBP/USD on a bullish bounce


The daily chart setup below shows that the bearish action of GBP/USD was getting exhausted as De Marker oscillator bounced off the oversold line, crossing it from below. The trading signal pointed to the start of the CALL option cycle, which was executed on the hourly timeframe (see the second screenshot).

Demark Indicator


Demark Indicator

Buying put options for GBP/USD on a bearish divergence


The four-hourly chart below has a sequence of higher highs. However, De Marker oscillator had lower highs as the screenshot below shows. After the last upside swing, the indicator was limited by the overbought threshold, failing to cross it from below. That signalled the start of the trading cycle to buy put options. As further development shows, the downtrend lasted more than five days. The number of red candlesticks was much larger than the green ones.

Demark Indicator

Tom DeMark formula Calculation


As already mentioned above, the indicator uses highs and lows to get maximum efficiency. However, this approach might lead to a large number of false signals as the financial markets are vulnerable to price spikes and whipsaws, which do not always reflect the trading conditions. Therefore, Tom Demark used an additional smoothing, implementing a simple moving average to the chosen period. In other words, filtering allows the mathematical formula to reduce market noise.

Here is Formula:
DeM = SMA (DeMMAX) [SMA (DeMMAX) + SMA (DeMMIN)]

Where DeMMAX is the difference between two previous bars’ highs and DeMMIN is the difference between two lows. These values are equal to zero if the sequence of higher highs and lower lows is breached.

Examples of using


Technical indicators work best in combinations. As Demark is the indicator, it has quite a fast reaction to the price change. Thus, it’s worth adding a slower or less sensitive indicator to double-check the trading signal. At the same time, oscillators perfectly show overbought and oversold conditions, but they struggle to point out the long-term trend’s direction as well as identify current momentum. Thus, trend and momentum indicators might add efficiency to the combination. Below are several examples of how different indicators complement each other.

Demark indicators with MACD and EMA


The hourly chart of EUR/USD below shows an uptrend of the currency pair. Although Demark indicators did not have any signal except crossing the middle line from below, MACD lines were above zero, pointing to a sustainable bullish momentum. The 21-hours Exponential Moving Average acted as a support curve during the bearish counter-trend bounce. The combination of three indicators signalled the beginning of two profitable trading cycles to buy call options (green arrows on the screenshot).

Demark Indicator

Tom Demark with Ichimoku Cloud


USD/CHF was in a downtrend, according to the hourly chart below. Although Demark was uncertain as its value was hovering around the oversold level, Ichimoku Cloud Trend indicator became bearish since the leading span performed the bearish crossover. What’s more, hourly rates were below both Conversion and Base Lines, which acted as resistance curves, limiting bullish bounces. Therefore, the combination of two indicators provided a lucrative trading cycle to buy put options for the pair.

Demark Indicator

Conclusion


Demark Indicators are powerful technical tools to show overbought and oversold market conditions. They are multi-purpose and effective in terms of showing trend reversals and giving frequent trading signals. The mathematical formula is different from traditional oscillators as it is based on calculating high and low price values, which leads to higher efficiency and sensitivity. However, binary options traders should use additional technical indicators to enlarge the profitability of the trading strategy.


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