The Relative DeMarker (abbreviated – DeM) Indicator is a price-following oscillator that ranges between 0 and 1. The theory behind DeM indicator is similar to RSI indicator. The only difference is that DeMarker is based on past Highs and Lows rather than whole price movements.
DeMarker Technical Indicator shows the relation of the current extremums with the previous. For example, if the current maximum(Higher point of the particular period) is higher than the previous maximum, the difference between the two will be registered. Otherwise, if the current maximum is lower or equaling the maximum of the prior period, the null value will be recorded. The differences received for the specified number of periods are then summarized. The received value is used as the numerator of the DeMarker and divided by the same value plus the sum of differences between the price minima of the previous and the current periods (bars). If the current price minimum is greater than that of the previous bar, the null value will be registered.
Indicator drop below 0.3 is a sign of the bullish price reversal. When the indicator rises above 0.7 traders, expect the bearish price reversal.
DeM Indicator with long-term inputs will show the long term market tendency. Indicators based on short periods helps enter the market at the point of the least risk and plan the time of transaction so that it falls in with the major trend.
The DeM or DeMarks indicator was created by Thomas DeMark, founder of DeMark Investment Advisory.
DeM and RSI
The DeM indicator and RSI indicator rely on common principles; the only difference is that RSI takes into account close values of the periods, on the other side, DeM uses the difference between Highs and Lows. In other words, Rsi smoothes price motion, and DeMarker sharpens it.
The DeM indicator compared to RSI with the same period.
The value of the DeMarker for the interval n is calculated based on two main parts:
If high(n) > high(n-1) , then DeMax(n) = high(n)-high(n-1), otherwise DeMax(n) = 0;
If low(n) < low(n-1), then DeMin(n) = low(n-1)-low(n), otherwise DeMin(n) = 0;
Next, the value of the DeMarker is calculated:
DMark(n) = SMA(DeMax, n)/(SMA(DeMax, n)+SMA(DeMin, n));
SMA — Simple Moving Average;
n — the number of periods used in the calculation.
How to use it
Since DeM indicator often replaced by more known and popular RSI indicator, this paragraph will focus on the difference between these two indicators.
Similarly to RSI, Demarker has extremum levels. When the indicator falls below 0.3 (oversold), the bullish price reversal should be expected. When the indicator rises above 0.7 (overbought), the bearish price reversal should be expected.
As we see, we get a lot of false signals with this approach.
Naturally, like in the case of most oscillators, extremum crossing is not enough to be considered as a reversal signal, in most cases confirmation is needed, crossing extremum levels in both ways are good confirmation, as well as tuning extremums with previous readings.
Confirmation of reversal
As stated above, one of the popular methods to confirm reversal signal is to seek for double crossings of the extremum lines. In other words, the signal considered only when DeMarker line crossed extremum in both ways, in and out.
Such approach has too much lag. Probably, RSI, in this case, would work better.
The second popular approach is to use past peaks of the indicator as extremums. To put it in another way, The signal appears, when DeM touches it’s own last peack once again.
The complexity of this approach is to determine the past peak of the indicator. Nevertheless, it significantly increases the accuracy of the signals
DeMarker with RSI
DeM often used in pair with RSI, to confirm RSI reversal signals. This way we can reduce lag of DeM and improve RSI accuracy.