Divergences with DeMarker

Daniel L
Category:  Trading Articles
The DeMarker is an oscillator created by now the famous Tom DeMark, that acts in a similar way as its most famous “brother”: the RSI (Relative Strength Index). Its most important feature is that it is offered for free, as the other DeMark indicators come at quite a steep price.
DeMarker is to be found with the original settings in any trading platform, MetaTrader4 included. Simply go on the main menu and look for the Insert tab, then the Indicators tab, and under the Oscillators there’s the DeMarker.
Like the RSI, the DeMarker oscillator travels only within positive territory. It has values between zero and one, and two areas that show overbought and oversold conditions.
Being an oscillator, it appears at the bottom of a chart, mimicking the moves that the price makes.

How to Trade Divergences with the DeMarker Oscillator

Before discussing what, a divergence is and how to trade it with the DeMarker, it is worth mentioning why technical traders developed oscillators. The idea of an oscillator comes from the need to filter the fake moves that the price makes.
What if traders can tell if the price makes a fake move and can act on it? For this reason, oscillators show specific levels calculated by some mathematical formulas that interpret past data. Next, they plot the data under the current market price.
If the oscillator shows the same thing as the current price, that’s just fine. However, when the oscillator doesn’t confirm the move that the price makes, it means it is diverging from it.
A divergence has bullish or bearish implications. When it forms into the overbought territory, the divergence is bearish, and traders sell the currency pair.
In the oversold, naturally, a bullish divergence forms. Traders buy a currency pair.
The best way to spot divergences is to interpret the series of higher/highs and lower lows that the price makes. Because the oscillator imitates the price moves, traders closely watch for moments when the moves don’t coincide anymore.
For example, when the price makes two consecutive highs and the oscillator does the same thing, that’s alright. However, if the second high isn’t confirmed by the oscillator, that’s a bearish divergence and traders start selling the currency pair.
The reason why traders stick with the oscillator is because it considers multiple periods in its calculation. Hence, it is more “trustful” than the actual price.

Above is the EURUSD daily chart with the DeMarker indicator plotting the values corresponding to the 14 periods. Effectively, it means that the oscillator plots the respective values by considering the previous fourteen days.
The price made a lower low, but the DeMarker failed to confirm it. Moreover, another low came, and the oscillator still diverged.
As it turned out, the bullish divergence signaled the start of the most powerful trend in 2017 Forex market. The EURUSD broke higher and it didn’t stop until reaching 1.20 and then some more.
How to trade a divergence? Simply spot it and enter long or short when the oscillator enters the neutral area. As a target, either stay on the trade until the overbought or oversold area comes or wait for an opposite divergence to form.

Conclusion

While similar with the RSI, the DeMarker has the advantage of turning quicker. As such, traders value it more.
Some traders put both oscillators on the same chart and then look for divergences between the two oscillators. In any case, both the DeMarker and the RSI have the power to show important turning points.
Just that the DeMarker turns quicker.
 
 
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