Forex – The DeMarker oscillator

Thomas R. DeMark is a successful technical trader whose two technical trading manuals, The New Science of Technical Analysis (1994, Wiley Press) and New Market Timing Techniques (1997, Wiley Press), are known for their analytical and intelligent approach to financial markets. As well, he’s assembled a fascinating collection of proprietary technical indicators.

One of these is the cleverly named DeMarker, an oscillator that attempts to measure underlying demand. Without getting into the complicated calculations, the DeMarker compares the current time period’s price action to that of the previous time period without utilising a smoothing formula, illustrating whether traders are buying the currency pair or selling it, and giving news of price exhaustion as it happens.

The resulting oscillator is measured as a line graph between 0 and 1 (sometimes −100 to +100), rather like the more common relative strength index (RSI). But traders shouldn’t be fooled. By measuring price exhaustion rather than momentum, the DeMarker comes closer to indicating market tops and bottoms.

When reading the DeMarker:

• readings over 0.70 indicate a bear reversal, retraction, or incipient downtrend;
• readings under 0.30 indicate a bull reversal, retraction, or incipient uptrend; and
• readings between 0.30 and 0.70 indicate possible range-trading conditions.

Note that the DeMarker may be utilised with charts of all time frames in the forex trading market.

Below is the marked-up daily chart of the Euro versus the U.S. dollar, currency pair EUR/USD:

The two blue vertical lines indicate two of the points at which the DeMarker peaked over 0.70 during the initial uptrend on this chart. Note that each line coincides with the price action topping out and then retracting, just as the indicator was designed to do.

However, at this point the DeMarker and the price action diverge, illustrated by slanting red lines. The price rises again and sets a new high, but the indicator does not, remaining below the trigger 0.70 level. In cases of such divergence, the indicator is almost always correct, and this instance was no exception as the bulls take charge and the downtrend begins, illustrated with a turquoise trendline.

The six vertical green lines indicate each point where the DeMarker bottomed out below 0.30. With the exception of the fifth one, each line marks the point at which the downtrend paused and an upward retraction back toward the bullish trendline ensued.

Note that when the DeMarker bottoms out below 0.30, it signals an incipient retraction. However, the opposite does not always hold, as each incipient retraction is not always signalled by an indicator reading below 0.30. The vertical yellow line toward the right of the chart shows the period of trendless consolidation in late February and early March, with indicator readings oscillating between 0.30 and 0.70.

The far right of the chart shows a potential short-term double bottom, which is supported by the DeMarker’s drop below 0.30. If this plays out, the neckline for confirmation would be roughly 1.2600.