Introduction
to Tom DeMark Indicators
An Introduction to Tom DeMark Indicators
An
introduction to Tom DeMark Indicators written by Jeffrey
Tennant, Author of "The Mejt System".
The
Tom DeMark Sequential and Combo Indicators.
Anyone who has
lived through a waterfall market decline has got to wonder how people
would have the nerve to try to catch a falling knife. So did Tom
DeMark. In the late 1970s he devised some indicators, called TD
sequential and TD combo, which successfully indicated the area in which
the market was sufficiently oversold for one to expect a bottom to
form.
The same rules, applied in reverse, indicated the area of a potential
market top.
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Tom DeMark Indicators
Contents Index
Related Pages
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Although the rules for the sequential have been public knowledge for
over 35 years, most traders are unfamiliar with them.
I suspect that part of the reason is that DeMark prefers to use verbose
and obfuscatory prose rather than diagrams to explain many of his
concepts. His stuff is a hard read.
This article strives to summarize his basic points and explains the
conventions I use in my technical analysis charts. You
can see this analysis in the Mejt System
blog.
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Tom DeMark Indicators: The Sequential Indicator -
Set-up
A buy set-up occurs when there are 9 or more (There is no maximum)
consecutive bars, each of which closes under the close of the bar 4
bars prior to it. Please see the Set-Up examples in the Sequential
Indicator charts on page 2. The more stretched out these bars are, the
better the set-up. If either bar 8 or bar 9 of set-up closes under the
lows of all of the previous bars of the pattern, the set-up is said to
be perfect.
The high of the true range of bar 1 of set-up is called the TDST line
(for Tom DeMark Set-up Trend). The term “true range” means that any gap
is considered to be filled. The higher of the print high of bar 1 of
set-up or the close of the bar in front of it is the price level of the
TDST line.
There is resistance at, and one bar above the TDST line. I find the
TDST line one of the most helpful parts of DeMark’s work. Nothing
requires his sequential or combo indicator patterns to go to
completion, but the TDST line is present as soon as set-up is
completed, and it provides useful information.
The convention I use on my blog is that:
- A horizontal line demarcates
the TDST line
- An arrow indicates its origin
- The number 9 indicates
the ninth bar of a set-up
If the set-up is perfect, it is colored
white. If it is not, it is colored purple. If there is a new set-up in
the same direction it is colored yellow. (Tom DeMark labels each of the
first 9 bars in his books. I do so on occasion as well.)
Tom DeMark Indicators: The Sequential Indicator -
Countdown
The rules for set-up are rigid, but it should be noted that the rules
for countdown are more flexible.
Countdown in the Tom DeMark sequential indicator begins after a set-up
has
been completed. Bar 1 of countdown begins on or after bar 9 of
set-up. Please see the Countdown examples in the Sequential
Indicator charts on page 2. After a buy set-up, each bar of
countdown must close under the low of the bar two bars in front of it.
(The rules for countdown after a sell set-up require each bar to close
over the high of the bar two bars in front of it.) When 13 bars print,
countdown is completed and a signal is given. Please remember that the
indicator outlines the price area where a price extreme can be
expected. It does not give a precise entry price. The bars need not be
consecutive, and typically aren’t.
A buy signal indicates the area where we should expect a bottom. A sell
signal indicates the area to expect a top. The stop loss is based on
the closing price of the lowest bar of the pattern for a buy signal,
and the highest bar of a pattern for a sell signal. The stop loss for a
buy signal is based on the lowest bar, whether or not it is a numbered
bar in countdown.
Tom DeMark Indicators: The Combo Indicator
The Tom DeMark Combo indicator uses the same rules for set-up but a
different set of rules
for counting to 13. In my blog I print the sequential count in blue and
the combo count in green.
While the rules for sequential are repeated all over cyberspace, I
cannot find the rules for TD combo indicator anywhere on the internet.
Because of
copyright considerations, that limits what I can say here. One obvious
difference is that bar one of countdown begins at or after bar 1,
rather than bar 9, of set-up.
For the record, anyone who tries to trade based solely on what anyone
on the
internet says about the Tom DeMark indicators will probably lose more
than what
it would have cost to buy DeMark’s books. Patterns can fail, recycle
(start a new set-up) and be invalidated by a variety of different rules.
Now lets look at some examples of the Tom DeMark indicators on the
technical analysis charts in page 2. |
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