DeMarker Regular Divergence Forex Trading Strategy

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DeMarker Regular Divergence Forex Trading Strategy 2

Most traders would never advice trading against the trend. Most traders would agree that trading against the trend is a very risky trading plan. Many traders consider these types of trades like “catching a falling knife”.

However, there are some traders who go against the grain. They make their living trading against the trend. They aim to catch the market at its peak and sell it as it drops back down. On the flip side, they would also buy at the bottom and ride the trend as it heads back up. Although this line of thought is not the conventional way to trade, it does have some logic behind it. “What goes up must come down.” Price movements, when overextended would always reverse.

Traders who could trade these steep reversals often win it big. This is because reversals have a very high reward-risk ratio. This makes it up for the relatively lower win probability that reversal trades have.

However, there are ways to identify trend reversal setups that have a relatively higher win probability compared to other reversal setups. DeMarker Regular Divergence Forex Trading Strategy helps traders identify these high probability reversal setups even before the actual trend reversal occurs.

DeMarker Indicator

DeMarker Indicator, also known as DeM, is a technical indicator which helps traders identify momentum, trend reversals and oversold or overbought market conditions.

DeM is an oscillating indicator. Like most oscillators, it is aimed at helping traders identify market cycles. It is computed by comparing the most recent highest and lowest prices to the previous period’s highest and lowest prices. This provides traders an indication of the trend or momentum direction.

This indicator is an oscillating type of indicator. It is bounded within a range of 0 to 1. The market is considered oversold once the DeM line drops below 0.3 and overbought once the DeM line breaches above 0.7. During these conditions, there is a high probability that price might reverse. The trend reversal usually begins whenever the DeM line crosses back within the 0.3 to 0.7 range.

Trading Strategy

The DeMarker indicator’s reversal signal is a good way to anticipate trend reversals. However, not all reversal signals would result in a winning trade setup.

This strategy trades on higher probability reversal setups using the DeM indicator by incorporating divergences on the setup. Divergences are discrepancies between the height or depth of the peaks and troughs of price action and that on the oscillating indicator. Often, oscillators would mimic price action. However, in some cases, the oscillator and price action would differ. These scenarios are good trend reversal opportunities as price usually tends to reverse strongly.

Below is a chart of the different types of divergences.

DeMarker Regular Divergence Forex Trading Strategy

This strategy trades on Regular Divergences based on the DeM indicator. Regular divergences that are either oversold or overbought are good indications of a possible trend reversal. Trades are taken as soon as the DeM line crosses back within the 0.3 to 0.7 range.

Indicators:

  • DeMarker (default setting)

Preferred Time Frames: 15-minute, 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • A Bullish Regular Divergence should be identified on the DeM indicator.
  • The Bullish Regular Divergence should occur on an oversold condition (DeM line below 0.3).
  • The DeM line should cross above 0.3.
  • The candle should close as a bullish candle.
  • Enter a buy order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the fractal below the entry candle.

Exit

  • The DeM line should cross above 0.7.
  • Close the trade as soon as the DeM line crosses back below 0.7.

DeMarker Regular Divergence Forex Trading Strategy 2

DeMarker Regular Divergence Forex Trading Strategy 3

Sell Trade Setup

Entry

  • A Bearish Regular Divergence should be identified on the DeM indicator.
  • The Bearish Regular Divergence should occur on an overbought condition (DeM line above 0.7).
  • The DeM line should cross below 0.7.
  • The candle should close as a bearish candle.
  • Enter a sell order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the fractal above the entry candle.

Exit

  • The DeM line should cross below 0.3.
  • Close the trade as soon as the DeM line crosses back above 0.3.

DeMarker Regular Divergence Forex Trading Strategy 4

DeMarker Regular Divergence Forex Trading Strategy 5

Conclusion

Trading trend reversals are very risky yet very rewarding. Traders often enjoy higher reward-risk ratios, which could go as high as 4:1. This often covers up for the relatively lower win-rate due to the difficulty of timing the peaks and troughs.

This strategy however manages to have a better win-rate compared to most reversal strategies. This allows traders to enjoy best of both. They could earn high yields with a decent win rate.

This strategy is best combined with some price action and candlestick pattern setups. This would significantly increase the win probability of a trade and would allow traders to exit trades while profits are still near the maximum.

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