Wednesday, July 1, 2009

DeMarker Indicator

Recently I came across references to the use of the DeMarker indicator in Forex. Some even claimed it a cornerstone of their trading strategy. I suspect it is part of the hype to promote sales of their trading methodology.

It certainly stirred my curiosity to take second look at DeMarker.

It is amongst the host of indicators on the Meta-4 trader platform. Ah.. I remembered reading it long time ago. But I gave up unable to make sense out of it then.

This is the extract from the Meta-4 Trader User Guide:

Technical Indicators — DeMarker
The value of the DeMarker for the "i" interval is calculated as follows:
The DeMax(i) is calculated:
If high(i) > high(i-1),
then DeMax(i) = high(i)-high(i-1),
otherwise DeMax(i) = 0

The DeMin(i) is calculated:
If low(i) < low(i-1),
then DeMin(i) = low(i-1) - low(i),
otherwise DeMin(i) = 0

The DeMark indicator is calculated as:
DeMark(i) = SMA(DeMax, N)/(SMA(DeMax,N)+SMA(DeMin,N))

where SMA is the Simple Moving Average,
N is the number of periods used in the calculations.

I find the above so brief and cryptic mathematically I couldn't make sense out of it!
Fortunately the review of RSI is still fresh in mind - Eureka!

Let's take a quick recap of the RSI:

RSI = 1 - (1/1+Rs)
with Rs = Avg(Gains)/Avg(Losses)
and substituting;

RSI = Avg(Gains)/(Avg(gains) + Avg(Losses))

Avg(); is an averaging function = SMA()

Isn't this the exact form of the DeMarker formula!

Avg(Gains) => SMA(DeMax,N)
Avg(Losses) => SMA(DeMin,N)

So what is different?
RSI averages the gains and losses over a period.

DeMarker has a different treatment to the gains & losses over the period.
SMA(DeMax,N) takes into account only the difference between gains if the successive closing price is higher than the previous closing, else it is ignored (i.e. value set to zero and dropped)

Similarly SMA(DeMin,N) takes into account only the difference between loss if the successive closing price is lower than the previous closing, else it is ignored (i.e. value set to zero and dropped)

In a nutshell, both indicators utilize the basic formula of the form:

Indicator(%) = 1 - 1/(1 + Avg(G)/Avg(L))

RSI plots the true average of gains,(G), & losses, (L)


DeMarker averages the differences of gains,(^G) & losses, (^L);
where "^" means incremental

In mathematical sense, taking the difference between discreet serial time data is analogous to "differentiation" operation as in calculus of continuous functions. So in this sense DeMarker is gauging the average rate of price gains/losses.

Both indicators are useful to signal impending change in market direction. Generally I find the DeMarker is more sensitive as it tends to accentuates the high/low of cycles more. Double click to enlarge an illustration of their comparison.

Hope you find this meaningful and make your observations to draw conclusions.

Sunday, June 28, 2009

RSI Indicator

The RSI is among the widely used indicators. There are ample information around explaining its use, so no point repeating here. But I do find a lack of simple explanation providing insights behind the formula. Perhaps I can add a little in this direction.

To recap the RSI formula

RSI = 1 - (1/1+Rs); which keeps RSI within the range 0 to 1
or RSI(%)= 100 x RSI; range between 0 to 100%

where Rs = Avg(Gains)/Avg(Losses) over a period
The default period is normally set at 14

So this indicator basically takes the ratio of average gains/average losses

Hence when price movement is side way with Avg(Gains)=Avg(Losses), Rs = 1
RSI = 1/2 or 50%; the 50% line is visually useful too.

So it can be seen that if the
(average upward price movement) > (average downward price movement)
RSI > 50%

The 70% line is reached when Rs = 0.7/0.3 = 2.33 (by solving the formula)
i.e. (average upward price movement) = 2.33 times the (average downward price movement);
often taken as threshold entering the zone of price saturation being overbought.
I would simply interpret as Rs > 2 times.

Likewise, if the
(average upward price movement) < (average downward price movement)
RSI < 50%

The 30% line is reached when Rs = 0.3/0.7 = 0.433 (which I simply interpret as RS < 1/2)
i.e. (average upward price movement) = 0.433 times the (average downward price movement);
often taken as threshold entering the zone of price saturation being over sold.

One of RSI's usefulness is:

Its divergence from the price trend signals a potential trend reversal. This is revealed by lower values of Rs even as the prices move higher. This is also commonly visible on price charts as the "candle body" gets smaller (with a higher time frame) before a trend reverses. The RSI indicator shows this with more mathematical precision.

Saturday, November 22, 2008

Average True Range

The Average True Range is a measure of market volatility. So a useful indicator I use as a guide to set Stop Losses, instead of using a fixed Stop Loss for all market conditions. My rule of thumb is to take the ATR at 3 time frames (higher) away my trading chart.

True Range is the greatest of the following three values:

1. Difference between the current maximum and minimum (high and low); when the last closing price is within the current max. & min.

2. Difference between the previous closing price and the current maximum; when the current minimum is higher than the last closing price.

3. Difference between the previous closing price and the current minimum; when the current max. is lower than the last closing price.

Default setting Average True Range (14) means a MA of 14 periods.
Plot of MA(14)

Another interpretation of the ATR as volatility indicator is:
The higher the value of the indicator, the higher the probability of a trend change; the lower the indicator’s value, the weaker the trend’s movement is.

Accelerator & Awesome Oscillators

Though I don't use many technical indicators, I like to take a read and review them once in a while. I simply enjoy the insights provided by these indicators.

The Accelerator indicator (AC) is suppose to measure the acceleration & deceleration of the current driving force! Take a closer look at its formulae:

AO = SMA(median price, 5) - SMA(median price, 34)

SMA — Simple Moving Averages;
AO — Awesome Oscillator.

Do the formulae above look similar to MACD?
1. Remember, the MACD line is also the difference of 2 Moving Averages (MA), the Exponential MA instead of Simple MA. So it is analogous to the AO formula.

2. The MACD Histogram (or MA Oscillator) is given by:
OSMA = MACD - Signal; where the Signal is the MA(9) of the MACD line.
So it is the same form as the Accelerator (AC) formula

The differences are the default parameters in usage:
MACD (12, 26, 9) - if we change to MACD (5, 34, 5), then it is equivalent to the default settings of AC & AO!

See the results below (double click to enlarge graph).

The MACD (blue) line moves in sync with the AO envelope (green & red bars).
The MACD Histogram (yellow) is almost identical to the AC envelope (green & red bars).

In other words MACD also conveys the same underlying information only if you know how to decipher and interpret them with different parameter values!

Monday, September 22, 2008

Fancy Trading in the middle of nowhere?

Once in a while, I like to test the limit and push the boundary a little. Perhaps an occasion worth mention here (a repeat from my cheeky humor blog):

Couple of months back, I visited my friend CK in another lovely part of Thailand, Sangklaburi; 370KM & a 5hr drive north west from Bangkok. A mountainous region close to the Myanmar border & near one of Thailand's largest National Parks. It is also a place of displaced people; mainly the Mon and Karen tribes, many are without citizenship.

Some said the 'low energy' of this place has special appeal. Hmm.. I am not a strong believer of 'feng sui'. My interpretation is 'low human activities' that has appeal to me... a small population and out of way for any industrial development. Outside town, local people lives in harmony with nature and some agriculture. Few lost souls from 'farang' lands chose to settle here too!

What a lovely spot! Sat here with beer watching the storm approached.

One evening we rented a raft house.. towed to the middle of the lake for a night out. Similar to ones you see floating by the lake shore.

Guess the real motive? With my laptop and GPRS connection via a PDA phone.. I went online to do my forex right there! Wow.. it's quite incredible, middle of nowhere, I could trade as if in comfort of home... indeed a home away from home!

Spot where we anchored for the night.

Of course I wasn't doing any serious trading, just testing out a mobile lifestyle I always dream about.

Thursday, May 29, 2008

Tips to MT4 2-terminal setup

When trading multiple currency pairs, there are many charts to monitor. Switch between too many charts can be cumbersome, so it is useful to have more than one screen. Most Desktop PC & Laptops support an extra screen. So by adding one more screen, you can have the benefit of 2 screens with minimum cost.

I even find it useful with more than one MT4 accounts running concurrently; each with a different trading strategy. So I set up with 2 screens, one for each account.

Also in MT4, you can sign in from 2 trading terminals for the same account.

1. Set up dual screen is quite simple :
1) plug in the second screen to the VGA port
2) From the Desktop, right click -> select "Graphic Properties" -> Check on "Multiple Display" to complete the configuration. You may also set the extended display to the left or right of your PC/Laptop screen. I suspect procedure for different PC brand may vary; hence get an IT savvy guy to assist if needed.

2. To install another MT4 Trader Platform, run the set up program a second time. Follow the installation wizard as before except for the 2 steps below:

1) After the License Agreement step; the prompt shows:
C:\Program Files\Interbank FX Trader 4

Change to (as example)
C:\Program Files\Interbank FX Demo 2

2) The next setup prompt,
Select program group shows: Interbank FX Trader 4

Again change to
Interbank FX Demo 2

Upon completion of sign up, you will see the new Interbank FX Demo 2 newly installed at:
Start -> All Programs -> Interbank FX Demo 2

3. Sign in with another account:
At the MT4 trading platform; select file -> login
enter login ID & Password

Hope you find the above useful.

Wednesday, May 28, 2008

A Full Circle

Often in life, things come in full circle.. where am I coming from?

Back to the beginning of this blog - the Pareto Principle, remember the 20/80 rule? (or 80/20 rule whichever way you like)

One interpretation is try to achieve 80% of profits via the 20% of your trades... i.e. be highly selective and go for big kills.

Another perspective is the market don't provide such opportunities most of the times. I recall reading a comment the market moves sideways 70% and trends only 30% of the times. Doesn't matter if the statistics is accurate or not, it merely convince me to adopt the Sniper's Mentality.

May be better put this way: 80% waiting time, 20% productive trading times!

Well, I haven't done before a series of blogs so intense within a short time span. It is like a memory dump for me.. now I can take a breather.

What a sweet feeling I have an open trade right now that hits 105 pips to conclude this article.. good enough, closed it right away!