Demark Pivot Points: A Proven Tool for Market Timing

The Demark Pivot Points trading indicator, developed by Thomas DeMark, is a unique variation of technical indicators used to identify potential market trend turning points. Unlike standard types of pivot points, which rely on previous highs, lows, and closing prices, Demark Pivot Points adjust based on the relationship between the open and close.

Think of Demark Pivot Points as a GPS for price direction. Just as a navigation system adjusts your route based on real-time data, Demark Pivot Points adapt to real market conditions dynamically. This makes them especially useful for day traders, short-term traders, and professional traders who rely on informed decisions through pivot point study to remove emotional trading decisions.

Calculating precise pivot point levels without subjective interpretation is crucial for trading strategies. Since Demark Pivot Points dynamically adjust based on price behavior, they provide a structured framework for defining trade entries and exits.

Unlike traditional pivot points, which use fixed formulas, Demark Pivot Points are calculated based on whether the close was higher, lower, or equal to the open. The calculation involves a pivot value and subsequent pivot point calculations for support and resistance levels.

• If close is lower than open:
  X = High + (2 × Low) + Close
• If close is higher than open:
  X = (2 × High) + Low + Close
• If close is equal to open:
  X = High + Low + (2 × Close)

Once X is determined, the pivot point formula calculates key levels as follows:

• Pivot Point = X / 4
• Resistance Level = X / 2 – Low
• Support Level = X / 2 – High

These pivot points help traders determine potential price reversal points for the next trading day.

Trend Confirmation

• If the market opens above the central pivot, it suggests bullish momentum, and traders may favor long positions.
• If the market opens below the pivot point indicator, it suggests bearish momentum, making short trades more favorable.

Reversal Trading

• When price approaches resistance pivots, traders look for signs of weakness to initiate short positions.
• When the price nears the demand price pivot point, traders watch for buying pressure to enter long trades.

Breakout Trading

• A strong break above the supply price pivot point suggests continued bullish momentum, potentially leading to further price increases.
• A decisive break below the floor pivot may indicate continued bearish pressure, signaling an extended downtrend.

Unlike traditional variants of pivot points, which use fixed high, low, and close values, Demark Pivot Points adjust dynamically based on the relationship between the open and close. This makes them more adaptive and responsive to trend direction.

• Traditional pivot points use static calculations that remain unchanged throughout the previous trading period.
• Demark Pivot Points adjust calculations to account for the market’s previous trading session opening strength or weakness.

This makes Demark Pivot Points especially useful for range-bound markets and traders who need a more dynamic approach to resistance analysis.

Systematic trading thrives on objective, repeatable rules rather than emotional decision-making. Demark Pivot Points provide a structured way to determine price levels, making them ideal for systematic traders.

Why Systematic Traders Use Demark Pivot Points

• Eliminates subjectivity – Unlike discretionary trading, systematic trading relies on pre-defined rules. Demark Pivot Points give traders precise levels to follow.
• Backtesting for an edge – Traders can test whether Demark Pivot Points improve trade accuracy over previous trades.
• Automated trading readiness – Since the calculation method is rule-based, trading algorithms can easily integrate Demark Pivot Points.

Entry Rules

• Buy when the price crosses above the pivot point breakout level and volume confirms a breakout.

Exit Rules

• Sell when price crosses below the pivot point bounce level and RSI confirms bearish momentum.
• Use a trailing stop for a range trading system.

Following these predefined rules removes emotion and inconsistency from trading strategies.

Market Whipsaws and False Breakouts

Since Demark Pivot Points are based on previous trading day conditions, markets that gap up or down significantly can produce misleading signals.

Solution: Use signal line crossovers or combine Demark Pivot Points with Chande Momentum Oscillator or Ultimate Oscillator to filter out false breakouts.

Over-optimization and Curve Fitting

Some traders tweak Demark Pivot Point settings to fit historical data too perfectly, which may not work in future price movements.

Solution: Ensure the Demark Pivot Point chosen is within an area of robustness, working effectively over several different levels.

Sensitivity to Market Open Price

Since the calculation relies on the lowest price of the previous bar, sudden changes in liquidity (such as pre-market volatility) may distort effectiveness.

Solution: Avoid relying solely on Demark Pivot Points and combine them with other technical indicators or trend lines.

• Use Higher Timeframes for Greater Accuracy: Daily and weekly charts tend to provide more reliable support and resistance levels than intraday charts.
• Combine with Other Indicators: Use MACD, stochastic oscillator, or Alligator Oscillator to confirm momentum before taking a trade based on Demark Pivot Points.
• Wait for Price Confirmation: Avoid placing trades solely based on pivot points. Look for other technical indicators for confirmation before entering.
• Adjust for Market Conditions: In volatile markets, use a wider stop-loss.
• Backtest Before Using in Live Trading: Test pivot-based strategies over different time periods and market conditions to see if they provide an actual edge.

Demark Pivot Points provide a powerful, adaptive approach to pivot point study. They offer a unique edge over traditional standard pivot points by dynamically adjusting based on previous price behavior.

To successfully trade using Demark Pivot Points:

• Always backtest your strategy to ensure effectiveness.
• Combine pivot points with other technical indicators for better accuracy.
• Follow a systematic, rules-based approach rather than making subjective decisions.

Want to learn how to build a systematic trading strategy that removes uncertainty? Check out The Trader Success System and take your trading to the next level.