Jan 9, 2013

Tom Demark Sequential

Books which I have found and have read:
New Market Timing Techniques - Thomas R. Demark. Written by Tom Demark itself but it is difficult to read and understand. I have needed several months to understand the idea and to summarize the information bellow.... and than I found the following book:
DeMark INDICATORS - Jason Perl. A great book about Demark indicators easy to read and understand. The theory is presented in a way which is very easy to understand. I recommend you to read it. But Murphy's law I have found it one week later... when I already had the information which I have needed:)

The post is not intended to be a comprehensive guide how to trade using Tom Demark's technique there is books about that. In "DeMark INDICATORS by Jason Perl" for example you can find the info - when trading signal is appearing/entry level/stop level etc. and much more TD indicators and techniques.
The post is intended to be a quick reference so we do not need to look for the rules each time on Internet or in the books:) I will post my thoughts and some charts which will help you to understand how to apply Tom Demark's method in the practice. I am not a Pro but I hope that the post will be a good starting point for you to start using TD Sequential in real trading.


------------------------------------------------------------------------------------------------------------------------------------

TD Sequential indicator consist of two components. TD Setup is the first one and it is a prerequisite for the TD Countdown – the second component.

1.TD Setup
TD Setup compares the current close with the corresponding close four bars earlier. There must be nine consecutive closes higher/lower than the close four bars earlier.

TD Buy Setup - prerequisite is a bearish price flip, which indicates a switch from positive to negative momentum.
– After a bearish price flip, there must be nine consecutive closes, each one less than the corresponding close four bars earlier.
– Cancellation - If at any point a bar closes higher than the close four bars earlier the setup is canceled and we are waiting for another price flip
- Setup perfection – the low of bars 8 or 9 should be lower than the low of bar 6 and bar 7 (if not satisfied expect new low/retest of the low).

TD Sell Setup - prerequisite is a bullish price flip, which indicates a switch from negative to positive momentum.
– After a bullish price flip, there must be nine consecutive closes, each one higher than the corresponding close four bars earlier.
– Cancellation - If at any point a bar closes lower than the close four bars earlier the setup is canceled and we are waiting for another price flip
- Setup perfection – the high of bars 8 or 9 should be greater than the high of bar 6 and bar 7 (if not satisfied expect new high/retest of the high).

----------------------------------------------

2. TD Countdown - after a setup is finished the countdown can begin from bar 9 of the setup.
TD Countdown compares the current close with the low/high two bars earlier and you count 13 bars. Unlike the Setup, the Countdown doesn’t have to be a sequence of 13 consecutive price bars. If it is interrupted you just do not count the bars and when it resumes you continue counting further.

TD Buy Countdown starts after the finish of a buy setup. The close of bar 9 should be less than the low two bars earlier. If satisfied bar 9 of the setup becomes bar 1 of the countdown. If the condition is not met than bar 1 of the countdown is postponed until the conditions is satisfied and you continue to count until there are a total of thirteen closes, each one less than, or equal to, the low two bars earlier.
Countdown qualifier - The low of Countdown bar thirteen must be less than, or equal to, the close of Countdown bar eight.
Countdown cancellation:
- A sell Setup appears. The price has rallied in the opposite direction and the market dynamic has changed.
- close above the highest high for the current buy Setup (break of TDST for the current Setup)
- recycle occurs ( new Setup in the same direction and recycle activated )

TD Sell Countdown starts after the finish of a sell setup. The close of bar 9 should be greater than the high two bars earlier. If satisfied bar 9 of the setup becomes bar 1 of the countdown. If the condition is not met than bar 1 of the countdown is postponed until the conditions is satisfied and you continue to count until there are a total of thirteen closes, each one greater than, or equal to, the high two bars earlier.
Countdown qualifier - The high of Countdown bar thirteen must be greater than, or equal to, the close of Countdown bar eight.
Countdown cancellation:
- A buy Setup appears. The price has rallied in the opposite direction and the market dynamic has changed.
- close below the lowest low for the current sell Setup(break of TDST for the current Setup)
- recycle occurs (new Setup in the same direction and recycle activated)

Aggressive TD Sequential – the difference is the Countdown phase. You compare high/low (not the close ) with the high/low two price bars earlier.
Aggressive Sequential always produces buy and sell signals before Sequential does.


----------------------------------------------

3. TD Combo
TD Combo is better when you have sharp directional moves, because it requires only thirteen price bars from start to finish compared to TD Sequential which needs at least 22 bars. The criteria for a Setup within TD Combo are the same with those required for a Setup within TD Sequential. The difference is that the count starts at bar 1 of the setup and not from bar 9 and TD Combo requires four conditions to be satisfied simultaneously.

Requirements for a TD Combo Buy Countdown
- close lower or equal than the low 2 trading days earlier.
- The low of a countdown day should be less than the previous "trading day‘s" low
- The close of a countdown day should be less than the previous "trading day‘s" close
- The close of a countdowns day should be less than the previous "countdowns day‘s" close
- bars 11,12,13 each one should just close successively lower and the other rules above are not applied

Requirements for a TD Combo Sell Countdown
- close higher or equal than the high 2 trading days earlier.
- The high of a countdown day should be greater than the previous "trading day‘s" high
- The close of a countdown day should be greater than the previous "trading day‘s" close
- The close of a countdowns day should be greater than the previous "countdowns day‘s" close
- bars 11,12,13 each one should just close successively higher and the other rules above are not applied

----------------------------------------------

Bearish Price Flip - occurs when the market records a close greater than the close four bars earlier, immediately followed by a close less than the close four bars earlier.
Bullish Price Flip - occurs when the market records a close less than the close four bars before, immediately followed by a close greater than the close four bars earlier.

TDST level – this is the highest high(usually the high of bar 1) for a buy setup or the lowest low(usually the low of bar 1) for sell setup, also called true high/low for a Setup.
- If a move cannot close above or below the TDST level of the most recently completed Setup in the opposite direction that means the momentum is weak and this is just a corrective move.
- If a move closes above/below the TDST level of the most recently completed Setup in the opposite direction that means that the momentum is strong enough and the price should then continue in that direction , and with high probability a TD Countdown will be completed before a reversal occurs.

True low/True high – is the lowest and the highest point for a setup, BUT including gaps before bar 1 and the days after the 9-th bar, qualifying for a setup bar.

Sell zone/Buy zone after finished TD Sequential – find the bar which records the highest high/lowest low for the countdown, find the range of the bar plus gaps and project it from the high/low of the bar. After finished TD Sequential/Combo the price should make a top in this zone not later than 12 price bars after bar 13 for the countdown. If the market breaks this level the signal is negated and we are witnessing renewed strength.

Setup Recycle - A second setup appears in the same direction before/on/after a Countdown - that usually means strength. The question is recycle and start a new Countdown? (there must be a price flip to divide the two setups or the first just continuous)
Compare the size of the two setups. The size is the difference between the true high and true low of a setup.
- if the second setup is equal or greater than the previous one , but less than 1.618 times its size, then Setup recycle will occur – the trend re-energize itself. Whichever Setup has the larger true range will become the active Setup.
- ignore setup recycle if the new setup is smaller or 1.618 times and more, bigger than the previous one – most probably price exhaustion area.

TD Sequential Reinforcement - 9-13-9 sequence
After a Buy Countdown the market temporarily trades higher and produces a Price Flip and subsequently a TD Buy Setup appears, this is known as a TD Sequential 9-13-9 Buy Count.
Requirements for a valid Sequential 9-13-9 Buy Count:
- The Buy Setup must not begin before or on the same price bar as the completed Buy Countdown
- The second Buy Setup must be preceded by a bullish Price Flip
- There must be no completed Sell Setup prior to the appearance of the Buy Setup.

After a Sell Countdown the market temporarily trades lower and produces a Price Flip and subsequently a TD Sell Setup appears, this is known as a TD Sequential 9-13-9 Sell Count.
Requirements for a valid Sequential 9-13-9 Sell Count:
- The Sell Setup must not begin before or on the same price bar as the completed Sell Countdown
- The second Sell Setup must be preceded by a bearish Price Flip
- There must be no completed Buy Setup prior to the appearance of the Sell Setup.

------------------------------------------------------------------------------------------------------------------------------------



P.S. There is special software which counts for you with a bunch of other TD indicators etc. If you want to trade using TD Sequential you should probably use such software and buy some books. I use TD Sequential in a combination with technical analysis and count by myself. That is good enough for me and the summary above is all I need.


So what should we do with all this bunch of 9's and 13's ?????

TD Sequential is a great tool for identifying trends, measuring momentum and spotting areas of price exhaustion.

I use TD Sequential as a complementary technique to technical analysis(TA) and that is my interpretation:
- Price flip indicates short term reversal of the momentum up<->down. Look at your charts if there is no reversal signs that means short term pullback and you can load more in the direction of the trend. Or you are expecting a reversal than a price flip is a great way to trigger an entry(take profits) for a new swing trade.
- The appearance of a TD Setup confirms strong momentum in it's direction. After a swing has begun, up or down, the appearance of a TD setup says the momentum is strong enough. It's absence is a valuable information too - the move is just a correction expect a resumption of the trend.
- Countdown 13 is the trending phase – when a setup has finished and a countdown has begun the market is in a trending phase. The odds are very high that the move will not finish before it records 13 in the corresponding direction, just watch out for a setup in the opposite direction. When a countdown has finished the price has reached an area of exhaustion watch out for a reversal.

As every technique it has it's weaknesses. I have not found answer in the books of the following questions:
- its called sell setup because the price is moving up and after a setup is finished you should sell - should I really sell? Should I expect a follow trough on the upside and the start of a countdown? - The answer which I found is watch if the setup has broken the TDST of the previous setup in the opposite direction. Not good enough for me.
- and when the countdown is finished should I sell or expect another 9/13.... usually you have a reversal after finished countdown but if you see the charts that is not always the case. The only hint which I have found is Sell zone/Buy zone - it's good enough, you have entry level,stop level and you know when you are wrong.

It's not so bad:) using TA you can solve this issues. And one thing in which TD Sequential is better than TA - the indicators can tell you the market is overbought but for how long can it stay overbought.... TA does not have the answer. TD sequential can tell you when the trend has reached exhaustion - when countdown 13 is finished.


Lets take a look at the charts.... I would say TD Sequential has pretty high success rate, if I am honest much higher than most oder indicators or techniques. I am not a pro applying TD indicators and probably some counts are wrong but combined with TA its a valuable tool for me. My overall score based on the charts bellow is TD Win:TD Loss 10:5 - not bad.
Oooo and notice that these are not charts specially selected for some book showing you when some method is working conveniently not showing you the charts when its not working:) These are just the SP500 charts for the last several years... this is happening now.

The charts are self-explanatory, I will comment what I think is interesting.....
- Aug-Oct 2011 huge drop, everybody were scared, bearish market will resume bla bla... I have said we will see lower low with divergence, first it was 18 month cycle low and second a bear market does not start with a "BANG". Nice... low but when? - When the count is finished:) 13 spot on the last bar for the decline TD Win:TD Loss 1:0
- Oct 2011 sharp rally has started so combo is your tool. When to expect a pullback so we can jump on the rally if you missed it or is it too late to jump on - 13 combo finished and spotted the top of this rally. TD Win:TD Loss 2:0
- corrective mess followed and it reached 8 of a setup - the decline into December. You can say that the cancellation of the buy setup failed to produce buy signal or say failed setup says this is just a correction and the trend resumes. I knew that the move will not finish with just one wave up and one day miss is not a drama so I would say a point for both sides TD Win:TD Loss 3:1 is fair enough.
- from mid December rally up and up and up - TD Sequential produced 9-13-9-13. This is the second problem which I have mentioned above - when it will be over on the first countdown after 9-13-9 reinforcement? I do not have an answer. But you must admit 13 countdown spotted the top and if you look at the weekly chart 13 combo spotted the top too so for me TD wins TD Win:TD Loss 4:1
- the summer correction produced 12 Combo bars.... again 1 day miss honestly how many indicators do you know which can spot the exact top or bottom? Point for both sides is fair enough TD Win:TD Loss 5:2
- again sequence 9-13-9-13. The move is a mess but a countdown finished just before the plunge lower - point for both camps TD Win:TD Loss 6:3
- combo and countdown finished on Friday 11.01.2013... the future will show if TD Sequential wins or loses :)
The weekly chart - pretty damn good :) in order of appearance:
- sequence 9-13-9-9 but you must admit every time finished before a correction so one point for both sides TD Win:TD Loss 7:4
- TD sequential finished TD Win:TD Loss 8:4
- TD combo finished TD Win:TD Loss 9:4
- TD buy setup finished - that is the first problem mentioned above. When a setup is finished should I expect a countdown or reversal? no answer but spotted the reversal - one point for both sides TD Win:TD Loss 10:5

30 comments:

  1. Read through your post (very good summary!) and noticed you mentioned specialized software. If you're looking for something low-cost, you might want to check out my company's (ChartIQ) 9/13 count visual indicator.

    http://www.chartiq.com/how-chartiqs-9count-and-13count-indicators-work/

    ReplyDelete
  2. I have Per'ls book, this summary is missing some of the cancellation qualifiers for Countdown

    ReplyDelete
    Replies
    1. Hi,
      I find on page 21/22 "TD Buy Countdown Cancellation" and on page 34/35 "TD Sell Countdown Cancellation" only the three rules which I have posted.
      If you mean "TD countdown cancellation and recycle Qualifiers I and II" I kept it short and wrote only recycle activated and I can look at bellow the "Setup Recycle" rules.
      If I understand it right Qualifier I cancels a countdown and Qualifier II not - "The prior TD Buy Setup is the active TD Setup, and the TD Buy Countdown relating to it remains intact. "

      Delete
    2. Hello,
      First...thank you for taking the time to put up this site. You mention SOFTWARE, what software do you use to do the counts. Is that the software in your charts? If so, what is it.
      THX,
      J R

      Delete
    3. There is no easy answer:) you must invest either time or money. There is three solutions:
      - To pay for software - this is interesting if your trading is based mainly on Tom Demark Sequential
      - Program it yourself/find it programed on Internet - some trading software allow you to write programs like NinjaTrader or MetaTrader. (for MT4 - http://codebase.mql4.com/5685)
      - Count it manually - I do this because my trading is not based only on this method.
      It does not cost so much time. The negative you can make a mistake, but this is not so important the way I use it.
      I use its strength - to see when an index reached a potential point of exhaustion and than comes TA+indicators and the last word have the signals from the system. For me 9+13 means only something interesting could happen.

      The question is how important it is for you..... If you are interested, I would say the best option is to use Platform which supports programing and find the script on Internet or pay some one to write it for you.

      Delete
  3. Krasi...would you do an analysis on S&P500 D and W ? Thanks

    ReplyDelete
    Replies
    1. Do you mean TD D-Wave? It is too complicated to do it by hand and I think the extra value is not worth the work(unless a software do it for you). That is way I have not included it in the post. Simple Elliot ways will do the same.

      Delete
  4. Krasi...Elliot Wave is OK. I want to see what you think the S & P will do. Since we are bumping up at all time highs.

    ReplyDelete
    Replies
    1. I think SP500 will make ATH probably 2%-3% higher and reverse.. than we should see a real correction at least 10%

      Delete
  5. Hello Krasi....We look forward to your comments and there have been no updates since 9 MAR. What happened to you my friend?
    J R

    ReplyDelete
    Replies
    1. Everything is ok:) I am just too busy.... It will last until the end of the month and after that I will start posting again.

      Delete
  6. Which software do you use for your charts? It looks like eSignal????

    ReplyDelete
    Replies
    1. No, free charts on Internet http://www.freestockcharts.com/ and I count manually.... it is not difficult.
      I do not know free software counting TomDemark Sequential....

      Delete
  7. Hi Krasi
    I found your blog while searching for information on DeMark Sequential and I have to say that it's excellent. I've only recently started studying the Sequential and your comment about treating the 9 and 13 counts as indicating a buy/sell zone has helped tremendously.
    Looking at historical charts I have noted that after a buy 9 or 13, buying at the close of the next up candle would be an effective entry strategy. A high percentage achieve at least 1:1 depending on where the stoploss would be placed. The biggest decision though is deciding if the 9 or 13 counts are indicating a change of direction or a pull-back which gives the opportunity to enter in the direction of the prevailing trend.

    I checked the MT4 code mentioned above and a variant that I found elsewhere. Both are incomplete and have errors which invalidate the counts they display. I am in the process of coding an indicator for myself, if I get it right I'll post here to let you and others know.

    All the best

    Michael

    ReplyDelete
    Replies
    1. Hi Michael,
      it took me a lot of time and energy to understand the idea and how to use it.
      I wrote the post hoping that I will save the readers some efforts:) and I am glad that it is useful.

      I can only congratulate you that you are ready to share your work with the others.
      Good luck with it.

      Delete
  8. Dear Krasi,

    Thank you for the wonderful summary.

    I have a few questions which I hope you can help to answer:

    1. In the bullish 9-13-9 sequence, it was mentioned that this to be valid, the second 9 buy set-up must me preceded by a bullish price flip. I must be missing something in the books because I understand that a buy set-up starts with a bearish price flip before the 1 count starts. Does this then mean that after the bar 13 of the countdown, it is followed by a bullish price flip and subsequently a bearish price flip to start on the second buy set-up.
    2. It is said that the count down is cancelled if a opposing set up appears. My question is do we have to wait for the set-up to complete to cancel the countdown or does the mere appearance of an opposing set-up in progress cancels the countdown.
    3. As you have mentioned, does the completion of the set-up indicates continuation of or reversal. The book states if it doesn't break the previous TDST level, there is a chance that it will reverse but if the set-up breaks the TDST level, there is good chance that it will complete the countdown. Now, what if the completed sell set-up is far from the previous TDST level and close to its current set-up TDST level. Would we be expecting a reversal or continuation towards the previous TDST resistance level. Any new thoughts on this?

    cheers,
    KM

    ReplyDelete
    Replies
    1. 1. Short said yes... but I think this price flips should be between the two setups.
      When you finished counting 9 that does not mean that we have price flip on the next day, the market can continue closing
      higher/lower than four days ago. This means you need a price flip in the opposite direction so you can say the current
      setup is over. Than you can start counting another setup and if another price flip appears than you count two setups in the
      same direction.
      I think it is just technical issue to guarantee that you have two distinct setups and not just one long setup beyond 9.
      TomDemark has examples in his book for a bull market with never ending setups:) just there is no price flips for a long time.
      and this is only one setup although it lasts 20 bars for example.

      2. The setup should be finished. Very often there is pause/pullback in the trend and a price flip could appear or 2-3 days from
      a setup but this does not mean we have a reversal.
      From trader perspective if the pullback takes too long and we are at bar 6 for example you can look at where bar 7/8/9
      should close so that the setup is aborted - is it realistic? look at indicators and etc. and in practice you can take action earlier.

      3. I do not think that using only the sequential will give you a good answer. Setup means strength in EW terms I would say impulse. In your case far from the begging of the previous one and close to the beginning of current one - I would say
      probably wave A or wave C of a correction.
      I would not rely only on Sequential to make a decision.

      Delete
    2. Many thanks Krasi.

      Delete
  9. One of the biggest factors is context. A completed sell Setup during a strong uptrend is more likely to be a sign that there may be a pullback that can be used to enter long.
    If the price is moving sideways there is a much better chance of a switch in direction at least to close to the TDST. My observation is that much of the time that switch happens from the entry bar so in these cases it is possible to trade that move with a tight stoploss.
    This could be the basis for a trading strategy but I agree with Krasi that Sequential on it's own isn't enough; From reading the books I don't believe that it was ever intended to be used in isolation.

    All the best

    Michael

    ReplyDelete
  10. Dear Krasi,

    I've got a question regarding the cancellation of the countdown. Would like to know what you think about it. My question is, when a buy set-up is completed and while waiting for the countdown phase to begin or where the countdown phase has already begun, the price trades above the TDST Resistance level and based on the rule, I understand that the countdown is now cancelled. Since the countdown is cancelled because it has now traded above the resistance level, does it mean instead that we should be waiting for a new a new set-up to complete all over again (either a new buy or sell set-up) before we resume the wait for the countdown phase to begin?

    Btw, how would you define a break above the TDST resistance/support level as valid?

    Appreciate your thoughts on this. Thanks.

    cheers,
    KM

    ReplyDelete
    Replies
    1. Hello,
      yes, you need a finished setup before you start a countdown. Setup means strength in given direction and if the price moves below/above the TDST in the opposite direction "the strength is negated" so to speak. Than you wait to see another move, strong enough(setup) to start a countdown.

      Usually you need a close above support/resistance/TDST as a confirmation.
      I use other trading analysis and I am sure I will close trades before any TDST break.
      Strength(setup) and TDST break does not fit together.
      TDST break means that the move has already retraced more than 78,6% and the strength (setup) will be very suspicious.

      Delete
    2. Thanks for your thoughts on these.

      However, why do you say that Strength (or momentum) and TDST break do not fit together? TDST break means that the strength set-up will be very suspicious? According to the book, a break of TDST means bigger momentum and that the probability of the countdown phase to complete to count 13 is even higher.

      cheers,
      KM

      Delete
    3. In fact I mean exactly the same just misunderstanding - Setup in one direction and TDST break in the opposite direction do not fit together.
      I think TDST break should mean strength in the direction of the break out.

      Delete

  11. Weakness: TD ReI stays above +40 (or +45) for fewer than six price bars, and then falls back = Expect near-term gains.

    Strength: TD ReI stays below -40 (or -45) for fewer than six price bars, and then recovers =
    Expect short-term recovery.

    is this possible?

    ReplyDelete
    Replies
    1. This is what you can read in the book and TomDemark says this are the optimal settings - +40/-40 level and 6 price bars. The idea is if the oscillator can not stay overbought/oversold for more than six bars the move is weak it is not trending.
      I use only TD Sequential and I can not say how TD REI behaves, but I would say the idea should work.

      Delete
  12. Thanks you for your reply . please help
    how can code in ambibroker ?
    any idea

    ReplyDelete
    Replies
    1. No idea... look on Internet how to use/write code for Amibroker.
      I have found this for TD REI and Amibroker - https://www.amibroker.com/newsletter/02-2000.html

      Delete
  13. Dear Krasi, What an amazing site. Must congratulate you on the same. It really helped me a ton!! Just a question - Hows is the success rate of this indicator you use thats TD Sequential? Since you have been using it for sometime and I understand you use other indicators still it it close to 70% success rate on stand alone basis. Also if you can let us know which all other indicators works very well with this TD Sequential.. KINDLY ENLIGHTEN US :)

    ReplyDelete
    Replies
    1. Thanks!
      I do not have statistics, but I would say TD Sequential is a great tool to spot if a market is trending or not and if a trend is reaching a point of exhaustion.
      I use only the basics from every tool. From TomDemark theory this is Sequential(Setup/Countdown/Combo). The other tools I use are technical analysis,Elliott waves,cycles,market breadth.
      My experience shows taking a tool and digging deeper makes it only more complicated. The trick is to combine several tools and only the basics using their strength. When some tool do not show clear path look what the other tools are showing.
      The result of this combination is much higher accuracy....

      Delete