The Demark Pivot Point Strategy is a unique approach to using pivot points, developed by technical analyst Tom Demark, to identify potential reversal levels and key support and resistance zones in the market. Unlike traditional pivot point methods that are based on previous period high, low, and close prices, the Demark Pivot Point method incorporates price action more dynamically, making it particularly useful in volatile markets.

The Demark Pivot Point Strategy focuses on a set of four levels: Support 1 (S1), Resistance 1 (R1), Support 2 (S2), and Resistance 2 (R2). These levels are derived based on the previous day’s price action, but they incorporate the open, high, low, and close in a way that is tailored to the actual price behavior, providing more relevant levels for trading.

What is the Demark Pivot Point Strategy?

The Demark Pivot Point Strategy is a variation of the traditional pivot point strategy that offers a more price-sensitive approach to calculating key support and resistance levels. The Demark method adjusts the pivot calculation to reflect market conditions more accurately by using the opening price, the high, the low, and the close to derive pivot levels.

The key levels in this method are:

• R1 and S1: First resistance and first support levels.
• R2 and S2: Second resistance and second support levels.

These levels are calculated using a specific set of formulas that differ from the traditional pivot point calculation, giving them more relevance in terms of price action. The Demark Pivot Point is especially effective when dealing with intraday price movements and highly volatile markets.

How Does the Demark Pivot Point Strategy Work?

Here is a breakdown of how the Demark Pivot Point Strategy works:

1. Calculate the Demark Pivot Points:

Unlike traditional pivot points, Demark pivots are calculated based on price action dynamics, which allows them to more accurately reflect market sentiment. The key levels are calculated using a unique formula:

• Demark Pivot Point (P):
  • If the close is greater than the open:
    • P = (High + Low + (2 x Close)) / 4
  • If the close is less than the open:
    • P = (High + Low + (2 x Open)) / 4
  • If the close equals the open:
    • P = (High + Low + Close) / 3
• Support and Resistance Levels: Once the pivot point (P) is calculated, the support and resistance levels are derived:
  • R1 = P + (High – Low)
  • S1 = P – (High – Low)
  • R2 = P + 2 * (High – Low)
  • S2 = P – 2 * (High – Low)

These levels represent key areas of price action where price is likely to reverse (support or resistance). When price approaches these levels, it often experiences a reaction that can be used to inform trading decisions.

2. Price Action Relative to the Demark Levels:

Once the Demark pivot points and support/resistance levels are calculated, traders can use them to identify trading opportunities:

• Bullish Market (Above Pivot Point):
  • If the price is above the Demark pivot point (P), the market is considered bullish. Traders can look for opportunities to enter long positions near support levels (S1 or S2) and exit near resistance levels (R1 or R2).
• Bearish Market (Below Pivot Point):
  • If the price is below the Demark pivot point (P), the market is considered bearish. Traders can look for opportunities to enter short positions near resistance levels (R1 or R2) and exit near support levels (S1 or S2).

3. Breakout Trading:

The Demark Pivot Point Strategy can also be used for breakout trading. A breakout occurs when the price moves beyond a key support or resistance level, indicating the potential for a strong price movement.

• Bullish Breakout: A price breakout above R1 (first resistance) suggests a potential upward movement, with traders taking long positions.
• Bearish Breakout: A price breakout below S1 (first support) suggests a potential downward movement, with traders taking short positions.

In both cases, stop-loss orders can be set just below the breakout level to limit risk if the breakout fails.

4. Confirmation with Indicators:

To increase the likelihood of success, the Demark Pivot Point Strategy can be combined with other technical indicators to confirm the signals:

• RSI (Relative Strength Index): RSI can help confirm overbought or oversold conditions when the price is near key pivot points. For example, if the price is approaching resistance (R1) and RSI is above 70, this may indicate overbought conditions, making it more likely that the price will reverse.
• MACD (Moving Average Convergence Divergence): MACD can provide confirmation of bullish or bearish momentum, especially when combined with a breakout or reversal at key pivot points.
• Volume Analysis: Higher volume during a breakout above resistance or below support increases the reliability of the breakout.

5. Risk Management:

As with any trading strategy, risk management is essential. The Demark Pivot Point Strategy allows traders to set stop-loss and take-profit levels based on the calculated support and resistance levels.

• Stop-Loss: A stop-loss can be set just below the pivot point for long trades or just above the pivot point for short trades. For breakout trades, the stop-loss can be placed just beyond the breakout level.
• Take-Profit: Traders can set take-profit levels at the next significant support or resistance level, typically at R1, R2, S1, or S2.

Advantages of the Demark Pivot Point Strategy

1. Better Price Reflection: The Demark pivot points are based on actual price action (open, high, low, close), which provides a more accurate representation of key market levels compared to traditional pivot points.
2. Adaptability: The strategy works well in both trending and range-bound markets, allowing traders to profit from breakouts and reversals.
3. Clear Support and Resistance Levels: Demark pivots offer clear levels for support and resistance, which traders can use to enter and exit trades.
4. Risk Management: The strategy provides predefined levels for setting stop-loss and take-profit orders, making it easier to manage risk.

Key Considerations for the Demark Pivot Point Strategy

1. Market Conditions: The Demark Pivot Point Strategy works best in markets that are trending or volatile. In sideways or choppy markets, pivot points may not hold, and false signals may occur.
2. False Breakouts: As with any breakout strategy, there is a risk of false breakouts, especially in volatile markets. Using confirmation indicators like RSI, MACD, and volume can help mitigate this risk.
3. Timeframe Selection: This strategy is effective across different timeframes, but it is particularly useful for intraday trading. Traders using longer timeframes may need to adjust the strategy based on the prevailing market conditions.

Pros and Cons of the Demark Pivot Point Strategy

Pros:

1. Price-Action-Based Calculation: The Demark method is based on actual market data, providing a more dynamic and accurate view of key support and resistance levels.
2. Effective for Breakouts and Reversals: The strategy works well for both breakout and reversal trading, making it versatile in different market conditions.
3. Improved Risk Management: By providing clear levels for stop-loss and take-profit orders, the strategy helps traders manage their risk effectively.
4. Adaptable Across Markets: This strategy can be applied to various asset classes (stocks, forex, commodities, cryptocurrencies) and is suitable for different timeframes.

Cons:

1. Complexity: The Demark method may be more complex for beginner traders, as it requires understanding the unique pivot point calculation and how to use the strategy effectively.
2. False Signals: In highly volatile markets or sideways trends, false breakouts may occur, leading to losses.
3. Requires Additional Indicators: While the strategy is effective on its own, additional indicators like RSI, MACD, or volume are often necessary to confirm signals and increase trade accuracy.

Conclusion

The Demark Pivot Point Strategy is an effective and adaptable method for identifying key support and resistance levels based on price action. It works well in both trending and volatile markets, helping traders capture breakouts and reversals. By incorporating Demark’s unique pivot point calculation, the strategy offers a more dynamic view of market sentiment and price behavior.

However, like all trading strategies, it requires proper risk management, confirmation with other indicators, and an understanding of market conditions. With careful application and discipline, the Demark Pivot Point Strategy can be a powerful tool for traders looking to improve their market analysis and trade execution.

If you’re interested in learning more about advanced strategies like this one, explore our Trading Courses for expert-led guidance and practical trading techniques.