As you know, as a quant/math based trader, I am constantly trying to improve my odds and success trading via statistical based analyses. This not only includes doing stats based analyses on stocks, but also on the indicators and techniques I use to identify trends and changes.
One such indicator that I actually really like is the DeMark Reversal Point indicator by cheatcountry (indicator depicted in the chart above). I decided to do a study on this to determine its efficacy.
Study Parameters:
- Looked at SPY.
- Looked at 1 hour time period.
- To be successful, a sell signal had to yield a sell off BELOW the sell signal within 48 hours (2 days) and a buy signal had to yield a buy up above the buy signal within 48 hours (2 days).
- The entry price was guesstimated at the upper end of the signaled candle and the exit price was determined by the most commonly tested area below or above the signaled candles price point, to simulate a realistic exit (you are not going to get the entire move likely).
About DeMarker Indicator:
The DeMarker indicator (Also known as Demark or Demark 9) was created by technical Analyst Thomas DeMark. It is an oscillator study. The reason I like it is it uses intra-period high and lows to make determinations; whereas, other indicators use closing values. I like this as these are the same values I apply in my statistical analyses of stocks.
There are multiple different DeMarker strategies and indicators. If you are interested in learning more, there is an official website. I would suggest Googling it to check it out. Also, of course, check out cheatcountry’s indicator and his description of his indicator, which is the indicator used for this study.
Study Results:
Over the past 6 months, on SPY’s 1 hour chart, the Demark indicator produced 48 signals. Twenty-two (22) or 45.8% were “buy” signals and 26 (54.2%) were sell signals.
The success rate of all signals was 68.8%. The success rate WAS statistically significant when ran via one sample binomial test, with a p value of 0.014. This means that the results are likely not attributable to chance and are indeed a significant finding. The success rate was not statistically different between buy and sell, with buy signals having a success rate of 68% and sell signals having a success rate of 69%.
Of the successful signals, 19 (39.6%) did not happen until the second day, as there was initial continuation of the current trend; however, 15 or 31.3% happened the same day the signal was presented. Therefore, the signal was most likely to be realized the next day; however, this result is not statistically significant, therefore, there is equal chance of the signal yielding a result the same day as there is the next day.
Of the buy signals, the average increase in price was 4.40 points (SD = 3.76). Of the sell signals, the average resulting sell-off was -3.49 points (SD = 2.60).
Conclusion
The Demark Reveral Points indicator has a success rate of roughly 68.8% for SPY stock when used on the 1 hour chart. These results are statistically significant and likely not attributable to chance, and thus the indicator does, statistically speaking, increase your odds of a successful trade.
There are, however, many limitations. The limitations are as follows:
- 39.6% of the time, the indicator failed to identify a bottom or top to a trend and the trend continued into the next day, when the reversal ended up happening and would have made the trade profitable. Thus, this indicator alone should not be used to gauge entries and exits.
- As with pretty much all indicators, this indicator does not give you a price target and thus you must use alternative analyses to determine where your exit price should be.
- Owning to the sizeable continuation of the trend after the signal in many cases, if you enter around the signal price you will likely be stuck in pretty sizeable pullback that will put your position fairly red. This is somewhat concerning when you consider there is over a 20% fail rate on this indicator, and this could lead to some sizeable losses.
- This was only done on the SPY stock and the results cannot be generalized to other stocks.
Recommendations
The Demark indicator is a worthy indicator to add to your trading repertoire for SPY! But it should not, and no other single indicator should not, be solely relied on to determine your entries and exits.
This should not be construed as a rigorous and thoroughly tested. The indicator was tested on a single stock and over a small time period and on a single time frame. As a result, these results are not generalizable to other stocks and other timeframes.
Use all indicators at your own risk!
If you like this, be sure to give credit to its creator cheatcountry ! He did an awesome job creating this.
Also, if there is an indicator you want me to look at/test? Leave it in the comments below!
As always, trade safe! Leave me your questions/comments/criticisms below!
Take care
One such indicator that I actually really like is the DeMark Reversal Point indicator by cheatcountry (indicator depicted in the chart above). I decided to do a study on this to determine its efficacy.
Study Parameters:
- Looked at SPY.
- Looked at 1 hour time period.
- To be successful, a sell signal had to yield a sell off BELOW the sell signal within 48 hours (2 days) and a buy signal had to yield a buy up above the buy signal within 48 hours (2 days).
- The entry price was guesstimated at the upper end of the signaled candle and the exit price was determined by the most commonly tested area below or above the signaled candles price point, to simulate a realistic exit (you are not going to get the entire move likely).
About DeMarker Indicator:
The DeMarker indicator (Also known as Demark or Demark 9) was created by technical Analyst Thomas DeMark. It is an oscillator study. The reason I like it is it uses intra-period high and lows to make determinations; whereas, other indicators use closing values. I like this as these are the same values I apply in my statistical analyses of stocks.
There are multiple different DeMarker strategies and indicators. If you are interested in learning more, there is an official website. I would suggest Googling it to check it out. Also, of course, check out cheatcountry’s indicator and his description of his indicator, which is the indicator used for this study.
Study Results:
Over the past 6 months, on SPY’s 1 hour chart, the Demark indicator produced 48 signals. Twenty-two (22) or 45.8% were “buy” signals and 26 (54.2%) were sell signals.
The success rate of all signals was 68.8%. The success rate WAS statistically significant when ran via one sample binomial test, with a p value of 0.014. This means that the results are likely not attributable to chance and are indeed a significant finding. The success rate was not statistically different between buy and sell, with buy signals having a success rate of 68% and sell signals having a success rate of 69%.
Of the successful signals, 19 (39.6%) did not happen until the second day, as there was initial continuation of the current trend; however, 15 or 31.3% happened the same day the signal was presented. Therefore, the signal was most likely to be realized the next day; however, this result is not statistically significant, therefore, there is equal chance of the signal yielding a result the same day as there is the next day.
Of the buy signals, the average increase in price was 4.40 points (SD = 3.76). Of the sell signals, the average resulting sell-off was -3.49 points (SD = 2.60).
Conclusion
The Demark Reveral Points indicator has a success rate of roughly 68.8% for SPY stock when used on the 1 hour chart. These results are statistically significant and likely not attributable to chance, and thus the indicator does, statistically speaking, increase your odds of a successful trade.
There are, however, many limitations. The limitations are as follows:
- 39.6% of the time, the indicator failed to identify a bottom or top to a trend and the trend continued into the next day, when the reversal ended up happening and would have made the trade profitable. Thus, this indicator alone should not be used to gauge entries and exits.
- As with pretty much all indicators, this indicator does not give you a price target and thus you must use alternative analyses to determine where your exit price should be.
- Owning to the sizeable continuation of the trend after the signal in many cases, if you enter around the signal price you will likely be stuck in pretty sizeable pullback that will put your position fairly red. This is somewhat concerning when you consider there is over a 20% fail rate on this indicator, and this could lead to some sizeable losses.
- This was only done on the SPY stock and the results cannot be generalized to other stocks.
Recommendations
The Demark indicator is a worthy indicator to add to your trading repertoire for SPY! But it should not, and no other single indicator should not, be solely relied on to determine your entries and exits.
This should not be construed as a rigorous and thoroughly tested. The indicator was tested on a single stock and over a small time period and on a single time frame. As a result, these results are not generalizable to other stocks and other timeframes.
Use all indicators at your own risk!
If you like this, be sure to give credit to its creator cheatcountry ! He did an awesome job creating this.
Also, if there is an indicator you want me to look at/test? Leave it in the comments below!
As always, trade safe! Leave me your questions/comments/criticisms below!
Take care
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