DeMarker Indicator (DeM): A Complete Guide to Formula, Strategies & Effective Use

DeMarker indicator (DeM) is a momentum oscillator developed by technical analyst Thomas DeMark to help traders gauge buying and selling pressure in the market. Unlike many other oscillators, the DeM indicator is specifically designed to predict potential trend exhaustion and identify reversal points before they occur.

This leading indicator compares the most recent price action to the previous period’s price range to determine whether demand is increasing or decreasing. It’s commonly used across multiple markets including forex, stocks, and cryptocurrencies, making it a versatile tool for technical analysts.

The DeMarker oscillates between 0 and 100, with readings above 70 typically indicating overbought conditions (potential exhaustion of uptrend), and readings below 30 indicating oversold conditions (potential exhaustion of downtrend). These thresholds help traders anticipate when a market move may be losing steam.

How the DeMarker Indicator Works: The Formula Demystified

The Core Concept: Comparing Price Bars

At its heart, the DeMarker indicator measures demand by comparing current highs and lows to the previous period. The calculation involves two key components:

• DeMax (Demand Maximum): If the current high is higher than the previous high, DeMax equals the difference. Otherwise, it’s zero. This captures upward pressure.
• DeMin (Demand Minimum): If the current low is lower than the previous low, DeMin equals the difference. Otherwise, it’s zero. This captures downward pressure.

By isolating these directional movements, the DeMarker can identify when buying or selling pressure is dominant and when that pressure may be fading.

DeMarker Calculation Formula (With a Clear Example)

The DeMarker value is calculated using the following formula:

DeM = SMA(DeMax, N) / [SMA(DeMax, N) + SMA(DeMin, N)]

Where N is the period setting (default is 14), and SMA stands for Simple Moving Average.

Step-by-Step Numerical Example:

Let’s walk through a simplified 5-period example to understand how DeMarker values are calculated:

Period	High	Low	DeMax	DeMin
1	50	45	–	–
2	52	47	2	0
3	51	46	0	1
4	53	48	2	0
5	52	44	0	4

Calculation for Period 5:

• Average DeMax (periods 2-5): (2 + 0 + 2 + 0) / 4 = 1.0
• Average DeMin (periods 2-5): (0 + 1 + 0 + 4) / 4 = 1.25
• DeM Value: 1.0 / (1.0 + 1.25) = 1.0 / 2.25 = 0.444 or 44.4

This value of 44.4 suggests the market is in a relatively neutral state, neither overbought nor oversold. This step-by-step breakdown helps demystify what might otherwise seem like a complex indicator.

How to Read and Interpret DeMarker Values

Standard Thresholds: Overbought and Oversold

The DeMarker indicator uses a 0-100 scale with two key threshold levels:

• Above 70 (Overbought): When DeM rises above 70, it signals that buying pressure may be reaching exhaustion. This doesn’t guarantee an immediate reversal, but it warns that the uptrend could be losing momentum. Traders often watch for DeM to cross back below 70 as a potential sell signal.
• Below 30 (Oversold): When DeM drops below 30, it indicates that selling pressure may be waning. This suggests the downtrend could be nearing exhaustion. A cross back above 30 can signal a potential buying opportunity.

Important note: During strong trending markets, the DeMarker can remain in overbought or oversold territory for extended periods. Always combine with trend confirmation tools.

The Power of Divergence

One of the most powerful applications of the DeMarker indicator is identifying divergence between price action and the indicator values. Divergence occurs when price and the DeMarker move in opposite directions, often signaling a potential reversal.

Bearish Divergence:

• Price makes a higher high, but the DeMarker makes a lower high
• This suggests weakening upward momentum despite higher prices, often preceding a downward reversal

Bullish Divergence:

• Price makes a lower low, but the DeMarker makes a higher low
• This indicates diminishing downward pressure, often preceding an upward reversal

Chart annotation tip: When analyzing charts, draw connecting lines between price peaks/troughs and the corresponding DeMarker peaks/troughs to visually identify divergence patterns.

Step-by-Step: Adding and Setting Up DeM on Your Charts

For MetaTrader 4/5 (MT4/MT5)

• Open your MT4/MT5 platform
• Navigate to Insert > Indicators > Oscillators > DeMarker
• Set your preferred period (default is 14)
• Customize levels: add horizontal lines at 30 and 70 for overbought/oversold zones

For TradingView

• Click the Indicators button at the top of your chart
• Search for “Demarker” or “DeM”
• Select the indicator from the list
• Click the settings icon to adjust period and visual appearance

Optimizing Period Settings for Different Markets

The standard 14-period setting works well for most situations, but you can optimize it based on your trading style and market conditions:

• Scalping (5M-15M charts): Consider a shorter period like 10 for faster signals and more sensitivity to short-term momentum shifts
• Swing Trading (4H-Daily charts): Use a longer period like 20-25 to smooth out noise and focus on more reliable medium-term trends
• Volatile assets (crypto, emerging market forex): Increase the period to 18-21 and widen thresholds to 75/25 to reduce false signals
• Stable assets (major forex pairs, blue-chip stocks): Standard 14 period with 70/30 thresholds works well

Proven DeMarker Indicator Trading Strategies

Strategy 1: The Overbought/Oversold Reversal

This classic strategy aims to capture reversals when the market reaches extreme levels.

Entry Rules:

• Long Entry: Wait for DeM to drop below 30 (oversold), then enter when it crosses back above 30
• Short Entry: Wait for DeM to rise above 70 (overbought), then enter when it crosses back below 70

Risk Management:

• Stop-Loss: Place your stop just beyond the recent swing high (for shorts) or swing low (for longs). This protects against the trend continuing despite the overbought/oversold signal
• Take-Profit: Target a 2:1 or 3:1 risk-reward ratio, or exit when DeM reaches the opposite extreme (e.g., exit long when DeM hits 70)

Strategy 2: Divergence Confirmation with Price Action

Combining DeM divergence with candlestick patterns creates higher-probability setups by requiring both momentum exhaustion (divergence) and price confirmation (reversal pattern).

Setup Process:

• Identify bearish or bullish divergence between price and DeMarker
• Wait for a key reversal candlestick pattern to form (pin bar, engulfing candle, morning/evening star)
• Enter on the close of the reversal candle or on a pullback the following session

Example: Price makes a new high at 1.2500, but DeMarker makes a lower high (bearish divergence). Shortly after, a bearish engulfing candlestick forms. Enter short at 1.2480, place stop at 1.2520 (above the swing high), and target 1.2400 for a 2:1 reward-to-risk ratio.

Strategy 3: Using DeM as a Momentum Filter

Rather than trading DeM signals alone, use the indicator to filter trades from other systems, improving overall win rates.

Filter Rules:

• For long signals: Only take buy signals from your primary strategy (e.g., moving average crossover, breakout) when DeM is above 30. This avoids buying into severely oversold conditions where downward pressure may continue
• For short signals: Only take sell signals when DeM is below 70. This prevents shorting into extremely overbought conditions where upward pressure may persist

Benefit: This approach keeps you aligned with momentum and helps avoid counter-trend trades that have lower success rates.

Limitations, Risks & How to Avoid False Signals

While the DeMarker indicator is a valuable tool, it’s crucial to understand its limitations to avoid costly mistakes.

Key Limitations:

• Can remain in extremes during strong trends: In powerful uptrends or downtrends, DeM can stay overbought (>70) or oversold (<30) for extended periods. Trading reversals in these situations can lead to significant losses
• False signals in choppy markets: In sideways, range-bound conditions with no clear trend, DeM may generate frequent crossovers that don’t lead to sustained moves
• Lagging component: While designed as a leading indicator, DeM still uses moving averages in its calculation, which can delay signals slightly compared to pure price action

How to Mitigate These Risks:

• Use a trend filter: Combine DeM with a trend-following indicator like the Average Directional Index (ADX) or a 200-period moving average. Only take long signals when price is above the MA and short signals when below
• Never use DeM as a standalone system: Always require confirmation from price action, volume, or other technical indicators before entering trades
• Implement proper risk management: Always use stop-loss orders, limit position sizes to 1-2% of your account, and maintain disciplined risk-reward ratios (minimum 2:1)
• Practice with a demo account: Before risking real capital, test your DeM-based strategies on a demo account to understand how the indicator behaves in different market conditions

DeMarker vs. Other Oscillators: RSI and Stochastic

Understanding how the DeMarker compares to other popular oscillators helps you choose the right tool for your trading approach:

Feature	DeMarker (DeM)	RSI	Stochastic
Core Data	Compares highs & lows	Compares average gains/losses	Compares close to price range
Signal Focus	Exhaustion & impending reversal	Momentum strength & reversal	Overbought/oversold & divergence
Best Market Condition	Ranging, topping/bottoming markets	All conditions	Ranging markets
Key Advantage	Can be a leading indicator	Smooth, well-understood	Very sensitive, fast signals

When to Choose DeMarker:

• You want to anticipate exhaustion before price confirms it
• You’re trading in markets that show clear topping and bottoming formations
• You prefer an oscillator with a unique calculation methodology distinct from RSI

DeMarker Indicator – Frequently Asked Questions (FAQs)

Q: Is the DeMarker a leading or lagging indicator?

A: The DeMarker is designed as a leading indicator, aiming to anticipate trend exhaustion before price confirms a reversal. By comparing recent highs and lows to previous periods, it seeks to identify weakening momentum before prices actually turn. However, like all technical indicators, it incorporates historical price data and thus has some lagging characteristics due to its moving average calculations.

Q: What is the best timeframe to use with the DeMarker?

A: The DeMarker works on all timeframes, but reliability varies. Lower timeframes (5-minute to 1-hour) generate more signals but also more noise and false signals. Higher timeframes (4-hour to daily) offer fewer but higher-quality, more reliable signals. Most swing traders find the 4-hour and daily charts provide the best balance between opportunity and accuracy.

Q: Can I use the DeMarker indicator for cryptocurrencies?

A: Yes, absolutely. However, due to the high volatility typical in cryptocurrency markets, consider making adjustments to optimize performance. Try widening the overbought/oversold thresholds to 75/25 instead of 70/30, or using a longer period setting (18-21 instead of 14) to smooth the data and reduce whipsaw signals.

Q: What are the best indicators to combine with DeM?

A: The DeMarker works best when combined with trend-following indicators to confirm market direction. Consider pairing it with:

• Moving Averages (50-period, 200-period) to identify the prevailing trend
• Average Directional Index (ADX) to measure trend strength
• Price action patterns (candlestick formations, support/resistance) for precise entry confirmation
• Volume indicators to validate whether momentum shifts are supported by actual market participation

This multi-layered approach significantly improves the quality of trading signals and helps filter out low-probability setups.

Conclusion: Mastering the DeMarker for Better Trading Timing

The DeMarker indicator is a powerful yet underutilized tool that can enhance your technical analysis toolkit when applied correctly. By understanding its formula, interpretation methods, and practical strategies, you can use the DeM to identify high-probability reversal points and improve your entry and exit timing.

Remember these key takeaways:

• DeMarker is designed to be a leading indicator that anticipates trend exhaustion
• Focus on divergence patterns for the most reliable signals
• Always use DeM as a filter or confirmation tool, never as a standalone system
• Combine with trend indicators and price action for best results
• Optimize settings based on your trading style, timeframe, and market volatility

Start by practicing these strategies on a demo account to build confidence and refine your approach. As you gain experience, you’ll develop an intuitive feel for how the DeMarker behaves in different market conditions, allowing you to make more informed trading decisions.

About the Author:

This guide was created by experienced technical analysts with over a decade of trading experience across forex, stocks, and cryptocurrency markets. Our mission is to provide clear, actionable education that helps traders develop robust, profitable strategies without the promotional bias often found in broker-sponsored content.

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