The DeMark Trading Strategy
Automated trading with the help of inbuilt indicators in online trading platforms has made to process of forex trading easier, not only saving a lot of time but also doing away with the need to monitor markets on a continuous basis. Several strategies are used for automated trading actions, and the DeMark Strategy is one such popular strategy.
This price action trading strategy was created by Tom DeMark and is actually a trendline breakout trading strategy with some variation. The Tom DeMark indicator is widely used to draw automated trend lines, getting rid of the problems arising from different forex traders drawing different trend lines based on the same information from charts.
DeMark Strategy and Trendlines
This trading strategy can be used for any timeframe but is likely to give the best results when used for timeframes of 15 minutes and above. Traders wishing to trade in any currency pair can choose this strategy, provided they know how to draw and identify the trendlines. Automated trading systems do away with this requirement and allow all traders to use DeMark trendline indicators to make their trading decisions in a fruitful manner.
Two types of trendlines can be drawn, an uptrend line and a downtrend line. An uptrend line has a positive slope and is formed by connecting two or more low points, with the second low being higher than the first. This uptrend line acts as a support and indicates that the net demand is increasing, even as the price rises. A break below the uptrend line indicates the weakening of demand and a change in the trend.
Similarly, a downtrend line or falling trendline has a negative slope and is formed by joining two or more high points, with the second high lower than the first. This line acts as a resistance and indicates that net supply is increasing even as the price declines. A break above the downtrend line indicates that net supply is decreasing.
Buying and Selling Rules of DeMark Strategy
So, what is the next step once the trendlines are drawn? The buying and selling rules of the DeMark strategy require the breakout of a trendline. Once the breakout of a trend line is confirmed by the close of a breakout candlestick outside the trend line, a buy or sell order can be initiated. So, the following steps need to be followed to initiate a trade using the DeMark Strategy:
- Draw the trendlines.
- Wait for a break of the trendline on the chart. A breakout occurs when a candlestick closes above or below a trendline.
- Once the candlestick that breaks out of the trendline closes, place a pending buy stop or sell stop order a few pips away from the high or low of the candlestick.
- Previous swing highs or lows should be taken as the profit target levels.
The DeMark Strategy can be quite effective in allowing traders to catch the start of a new trend and ride it. It also allows one to enter into a trend that has been progressing for some time. Although this strategy has a good risk reward ratio, traders need to beware false breakouts. Also, a breakout candlestick may be very long, making the stop loss distance very long too. So, most traders use the DeMark indicator as a secondary tool of technical analysis so as to assess risk levels before entering or exiting a position.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.