DeMark (DM) Pivot Points are a unique and forward-looking technical analysis tool used by traders to forecast potential support and resistance levels for the next trading period. Developed by legendary technical analyst Tom DeMark, these pivot points differ significantly from traditional methods by placing a greater emphasis on the closing price relative to the opening price, offering a more nuanced perspective on market sentiment. They help traders anticipate crucial price levels where market direction might reverse or consolidate, providing valuable insights for strategic decision-making.
The Core Calculation of DeMark Pivot Points
Unlike classic pivot point calculations that often use a simple average of high, low, and close, DeMark Pivot Points incorporate the relationship between the opening and closing prices to derive a specific value that indicates market momentum. This method aims to provide more reliable and dynamic support and resistance levels.
Determining the 'X' Factor
The first step in calculating DeMark Pivot Points involves determining an intermediate value, 'X', which depends on the market's closing price in relation to its opening price from the previous period. This distinction is crucial as it reflects whether the market closed weaker or stronger than it opened.
Here's how the 'X' value is calculated:
| Condition | Formula for 'X' |
|---|---|
| If Close < Open | X = (High + (Low * 2) + Close) |
| If Close >= Open | X = ((High * 2) + Low + Close) |
Where:
- High (H): The highest price of the previous trading period.
- Low (L): The lowest price of the previous trading period.
- Close (C): The closing price of the previous trading period.
- Open (O): The opening price of the previous trading period.
Calculating the DeMark Pivot Point (P)
Once the 'X' value is determined, the DeMark Pivot Point (P) for the next trading period is calculated by dividing 'X' by 4.
Pivot Point (P) = X / 4
This single pivot point is then used to derive potential support and resistance levels.
Deriving Support and Resistance Levels
While the core DeMark system focuses on a primary pivot, Tom DeMark also provided formulas for calculating associated support (S1) and resistance (R1) levels:
- Support 1 (S1):
X / 2 - High - Resistance 1 (R1):
X / 2 - Low
However, some interpretations of DeMark Pivots primarily utilize the main Pivot Point (P) as the key level, with S1 and R1 acting as secondary areas of interest.
How DeMark Pivot Points Are Used in Trading
Traders employ DeMark Pivot Points for various strategic purposes, leveraging their predictive nature to enhance decision-making:
- Identifying Potential Reversals: When the price approaches a DeMark pivot level, it often indicates a potential turning point. A move above resistance or below support can signal a continuation, while rejection suggests a reversal.
- Setting Entry and Exit Points: Traders might look for buying opportunities near support levels or selling opportunities near resistance levels. Similarly, breaches of these levels can trigger stop-loss orders or profit-taking.
- Determining Trend Strength: Consistent trading above the pivot point might suggest an uptrend, while trading below it could indicate a downtrend.
- Risk Management: Pivot points provide clear boundaries for setting stop-loss orders, helping traders manage their risk exposure effectively. For instance, a trader going long near a support level might place a stop-loss just below it.
Key Advantages of DeMark Pivot Points
DeMark Pivot Points offer several benefits that distinguish them from other technical indicators:
- Forward-Looking: They provide predictive levels for the upcoming period, unlike lagging indicators.
- Dynamic: The calculation's reliance on the relationship between open and close makes them more responsive to recent market sentiment shifts.
- Clear Levels: They offer explicit price levels that can be easily identified and acted upon.
- Versatile: Applicable across various financial markets, including stocks, forex, commodities, and indices, and adaptable to different timeframes.
Practical Insights for Traders
- Confirmation is Key: Always use DeMark Pivot Points in conjunction with other technical indicators or chart patterns (e.g., candlestick patterns, volume analysis, moving averages) for confirmation. Relying solely on one indicator can lead to false signals.
- Adapt to Volatility: In highly volatile markets, price action around pivot points can be more erratic. Adjust your risk management strategies accordingly.
- Understand the Context: A pivot point's significance can increase if it converges with other significant technical levels, such as Fibonacci retracements or trendlines.
- Practice with Historical Data: Before implementing DeMark Pivot Points in live trading, practice identifying and reacting to them using historical data to build confidence and refine your strategy.
DeMark Pivot Points provide a robust framework for understanding potential future price action, offering a valuable edge to traders who integrate them effectively into their analytical toolkit. For more comprehensive information on pivot points and their applications, you can explore resources like Investopedia's guide on Pivot Points or similar educational platforms.
