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!

Comparing:
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)

while

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.