Técnica de Trading TD Lines de Tom DeMark

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Técnica de Trading TD Lines de Tom DeMark

TD lines o líneas de Tom DeMark

  • Para un TD Point máximo, se tiene un máximo antecedido y seguido de una misma cantidad de máximos menores que dicho máximo.
  • Con respecto a un TD Point mínimo, se tiene un mínimo antecedido y seguido por un mismo número de mínimos mayores que dicho mínimo.
  • La TD Line de demanda se traza uniendo todos los TD Points mínimos más recientes.
  • La TD Line de oferta se traza al unir los TD Points máximos más recientes.

En el siguiente ejemplo la figura (Gráfico EUR/USD) muestra todo lo que se acaba de mencionar en este apartado. Mediante círculos rojos se han marcado los TD Points máximos mientras que los círculos verdes se usan para designar los TD Points mínimos. Al unir los TD Points máximos se obtiene una TD Line de oferta mientras que al unir los TD Points mínimos se obtiene la TD Line de demanda.

Ahora que sabemos como dibujar las TD lines hay que apreder a saber usarlas adecuadamente. La idea básica es realizar operaciones con las roturas de estas líneas si bien no de cualquier manera, ya que el mismo DeMark ha creado una serie de reglas con el fin de dar validez a estas roturas. Estas reglas son las siguientes:

Roturas al alza

En caso de que alguna de las condiciones anteriores se dé, el trader puede considerar que la rotura es válida . Sin embargo entre más condiciones sean verificadas, el cruce tendrá mayor validez.

Roturas a la baja

En primer lugar, la barra anterior a la rotura debe ser alcista. Así mismo la apertura de la barra en que se dá la rotura debe ser inferior a la TD Line de demanda y al cierre de la barra anterior al mismo tiempo. Otra condición importante es que tanto el cierre como la parte inferior de la barra anterior a la rotura deberán estar por encima de la TD Line de demanda. Finalmente, la apertura de la barra en que ocurre la rotura debe ser menor a los dos cierres anteriores y el valor de la TD Line de demanda debe estar por debajo del mínimo de la barra anterior.

De la misma manera que en las roturas al alza, es suficiente con que una de estas condiciones se dé para que la rotura esté validada, sin embargo entre más condiciones se verifiquen mayor será la fiabilidad.

Si miramos nuevamente el gráfico anterior, podremos ver como la barra 3 previa a la rotura alcista, es una barra bajista lo cuál valida dicha rotura y el trader puede considerar entrar al mercado en ese punto. En este punto en que ya conocemos tanto el patrón de entrada como la validación del mismo lo que sigue es la manera de determinar los objetivos para el precio. De acuerdo a DeMark, después de una rotura al alza, el objetivo de la subida de precio es igual al nivel resultante de sumar a la TD Line en el momento de producirse la rotura, la distancia que hay entre el TD Point mínimo más reciente y la TD Line. De la misma manera, en caso de producirse una rotura a la baja, el objetivo de la caida será el resultado de restar a la TD Line la distancia que hay entre el TD Point máximo más reciente y la TD Line.

Continuando con el ejemplo anterior, si se analiza la siguiente figura se puede ver que el mínimo de la barra de color azul (TD Point Mínimo) es de 1.2575 mientras que el valor de la TD Line en ese punto era de 1.2607, por lo cual la diferencia es de 0.0032 (32 pips). Si se suma este valor a la TD Line en el momento en que ocurre la rotura, es decir a 1.2597, se obtiene como objetivo de subida un nivel de 1.2629, el cuál en este caso se cumple perfectamente.

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Logicamente como todo buen trader, DeMark siempre aplica la gestión de riesgo en sus operaciones por lo cuál estableció tres reglas para cerrar sus posiciones en caso de que las cosas no se desarrollen a su favor.

En caso de que se produzca una rotura al alza procederemos a cerrar nuestra posición si la barra que se forma despues de la rotura hace lo siguiente:

  • Abre precisamente abajo del nivel en que se produjo la rotura.
  • Se forma por debajo del cierre de la barra en que ocurre la rotura y cierra posteriormente abajo del nivel de rotura.
  • No consigue superar el máximo de la barra en la que ocurre la rotura.
  • Abre precisamente por encima del nivel en que se produjo la rotura.
  • Se forma por encima del cierre de la barra en que ocurre la rotura y cierra posteriormente arriba del nivel de rotura.
  • No consigue superar el mínimo de la barra en la que ocurre la rotura.

Por supuesto una vez que se produce el patrón hay que esperar a que ocurra una continuación del movimiento después del rompimiento. En caso de que esto no ocurra, hay que cerrar las posiciones con rapidez ya que en este caso el riesgo es demasiado grande y podemos terminar perdiendo más de lo necesario.

Forex Training Group

There is a wide array of studies within the technical analysis field, and many talented analysts and traders have contributed their work in this area. One of the brightest minds in the industry is a highly-respected market technician named Tom Demark. He has been an avid student of the market for decades and he is also the founder and the CEO of DeMark Analytics.

Over the years, DeMark has developed a number of trend analysis tools that he has shared with the larger trading community through several books that he written. This article will take a deep dive into some of the more popular works of Demark and present it to you in a practical way so that you can incorporate these ideas into your own trading routine.

Tom Demark Indicators

Demark indicators are useful in analyzing market trends. A Demark trading strategy helps a trader to evaluate the current state of the trend as well and the likely exhaustion point. Demark analysis has proved to be extremely valuable in terms of finding the terminal point of trends.

This type of end of trend accuracy can also provide an advantage for getting aboard the beginning of a new trend. As such Forex traders using Demark studies can incorporate them in both a contrarian approach and trend-following manner.

The truth of the matter is that Tom Demark indicators (TD indicators) are not that widely known among Forex traders. A large percentage of the forex community may not have ever heard of these studies. One reason for this is that there is not that much information about Demark’s work online compared to other indicators like the MACD, RSI, Stochastic, etc.

Technical Analysis Using Demark Indicators

TD indicators are used for in-depth trend analysis and can give you different signals based on the health of the current trend. Demark analysis can get quite complex depending on the indicator you are using, however we will focus on two that I believe offer the most value to the trader.

These two Demark tools are the TD Trendline ( also known as Demark Trendlines) and the TD Sequential ( also known as Demark Sequential). The application of these two studies will be the primary focus of the rest of this article.

Tom Demark Trendlines

The first Demark strategy we will go through is the Tom Demark Trendlines. I chose to start with this study because it is fairly straight-forward, but extremely powerful once you understand how to apply it. Let’s take a look at the chart below and pay close attention to the marked lines on the chart:

The TD trend line indicator basically consists of two lines. The upper one is bearish and goes through two of the most recent tops of the price action. The lower line is bullish, and it connects the two most recent bottoms on the chart. In this example, the price action is being squeezed within these two converging lines.

Depending on the type of TD trend line indicator that you are using, it can build and automatically draw the two lines for you dynamically. However, I am using an indicator that only marks the respective tops and bottoms with small circles. I can then use those data points to build the TD lines myself. The type that you incorporate will depend on your trading platform and personal perference.

Also, some variations of the TD trend line indicators will also plot additional lines above and below the current price action. These could be used as targets for potential trades. We will get into the details of this a bit later, but let’s first understand the actual TD line signal.

Demark Trendline Trade Signals

The signals that we get from the Demark Trend line indicator is very straight-forward. Essentially, we are looking for a price breakout through one of the two plotted lines.

A buy signal comes if the price breaks the upper line in the bullish direction. A sell signal comes if the price breaks the lower line in the bearish direction.

Demark Trendline Trading Strategy

Now let’s walk through a basic Demark trendline trading strategy that incorporates an entry point, stop loss, and target.

Entry Point

If the price breaks the upper Demark trendline, then you would open a long trade. On the contrary, if the breakout comes through the lower line, then you would open a short trade in the currency pair.

Stop Loss Order

If you are long, you can place your Stop Loss order below the lower trend line. If you are short, then the Stop can go above the upper line. If, using this method, the stop loss is at a distance that is relatively too far for your comfort level, then use an intervening swing for your stop loss placement.

Price Target

If you are using a more sophisticated Demark trendline indicator, you will likely have levels on the chart that are marked and suggested as a potential target. If you do not have this feature or prefer to manage the exit on your own, then you should watch next level support or resistance levels after the breakout for potential exit points.

Demark Trendline Trading Example

Now let’s proceed to a TD trend line trading example. Refer to the image below.

This is the 30-minute chart of the GBP/USD for June 16-19, 2020. The blue line and red line represent the Demark trendlines.

The buy signal comes when the price breaks the upper (red) line. Once that happens, we would look to execute a long trade and protect the position with a Stop Loss order. The stop loss can be placed below the lower Demark line.

The magenta line marks the most significant recent top on the chart. Notice the two Demark TL lines are compressing price action, and we expect to see a volatility expansion out of this consolidation. With the breakout to the upside, we are likely to see the most recent significant resistance level get tested, which is exactly what happens.

Tom Demark Sequential

The second Demark indicator that we will discuss is the TD Sequential indicator. This study is a bit more complicated and will require more practice to apply successfully in live market conditions. The TD Sequential indicator adds various numbers on your chart. These numbers are located above and below the Japanese candlesticks on the chart. If you take a closer look below, you will notice that most of these numbers are not random, but instead are in an ascending order starting from 1.

What you see above is the TD sequential indicator plotted on the price chart. Again this indicator contains only numbers marked at the upper or lower range of each candle. This may look confusing at first sight, but there is a method to this as you will soon learn.

Calculation of the TD Sequential Explained

So, as you may have guessed, the TD Sequential indicator represents a sequence related to the health of the current price trend. But how is the TD sequence built? Well, let’s have look.

An initial starting point is marked with a 1.

More specifically, for a bullish move, “1” is plotted when the price action closes a candle higher than the close of the candle four periods ago. Then on the following bar, a “2” is plotted when the price action closes a candle higher than the close of the candle four periods ago. And this rule is in force for every succeeding bar.

The “1” of a bearish price move is marked when the price action closes a candle lower than the close of the candle four periods ago. Then on the following bar, a “2” is plotted when the price action closes a candle lower than the close of the candle four periods ago. And this rule is in force for every succeeding bar.

Signals of the TD Sequential Indicator

There are two basic signals that come from trading the TD Sequential strategy. The signals forecast an exhaustion in price and a high probabity for an impending correction.

TD Sequential Bearish Signal

Let’s say we have a bullish trend. The price increases and on the way up we get the respective TD Sequential numbers: 1, 2, 3, 4, 5, 6, 7, and so on.

The bearish signal comes at the moment when the Demark Sequential indicator gives you the number “9”. This means that the price action has closed 9 consecutive candles where each has closed higher than the candle 4 periods earlier.

The signal is even stronger if the highs of candles 8 and 9 exceed the highs of candles 6 and 7.

When you confirm this pattern, this is very likely to result in a pullback in a bearish direction. The strength of the pullback is most likely to be seen during the first four candles after the confirmation of the candle that is marked with “9”.

TD Sequential Bullish Signal

The trend you are analyzing is bearish in this case. And the numbered candles will be bearish as well. In this scenario, for a bullish signal, we will need to have nine bearish candles – each of which closes lower than the candle that is located four periods earlier.

The bullish signal comes when the Demark Sequential indicator gives you the number “9”.

The signal is even stronger when the lows of the candles labeled with 8 and 9 are lower than the lows of candles 6 and 7.

Demark Sequential Trading Strategy

It is important to note that there are various detailed rules surrounding TD Sequential that Demark lays out in his book “The New Science of Technical Analysis”, but for our purposes here, we will go over the core principles and develop a trading strategy around that.

So now, I will combine what we have learned about Demark sequential and present a basic trading system based on these concepts. We will discuss the precise entry point for this system, the level of your Stop Loss order, and the price target that we should aim for.

In this specific example, we will discuss the bearish TD Sequential signal.

Entry Point

Firstly, you need to have a bullish trend in place. Then we will need to get nine consecutive periods that each close higher than the period four candles earlier. When you get the number “9”, you should short the market at the end of that period.

Stop Loss Order

You should place your Stop above the last high of the current bullish trend. However, make sure you keep it at a relative distance, so that your position will be able to handle any added volatility that occurs at the reversal point. Having said that, we are expecting a sharp pullback in a bearish direction.

The above chart a good illustration of where your Stop Loss should be in relation to the “9” signal within the bullish trend. You identify the 9 th candle of the pattern, and then you short the market placing a Stop at a relative distance from your entry point. Again, it’s important to note, that If the Stop Loss order is too tight, this may result in a pre-mature stop out due to increased volatility at the turning point.

Take Profit Target

There is no strict target related to this strategy. However, one suggestion for holding a trade on a bearish signal from the TD Sequential setup is to wait for the completion of the fourth candle after the potential reversal to exit. The logic is based on the fact that the four candles following the anticipated reversal are likely to be sharp and one-sided affairs.

So, you open a trade after the close of the candle labeled “9” and you close the position on the fourth candle following the reversal.

Trading Example with the Demark Sequential

Now let me show you how this TD Sequential system works on a price chart of the EUR/USD.

Above you see the H1 chart of the EUR/USD for April 14 – 18, 2020. The small red and blue numbers on the chart image are the same values taken from the Demark Sequential indicator. The chart has a bullish trend that will we will monitor closely for a bearish TD Sequential signal.

Notice the numerated black points on the chart. They show the 1-9 sequence of the bullish trend on the chart. The sell signal comes when the number “9” is printed on the chart. The stop should be placed at a relative distance above this high.

As you can see, the next candle is bearish. It has a relatively high upper candlewick, forming a bearish Pin bar formation, which itself, is a harbinger of an impending decline. Notice that since we placed our stop at a reasonable distance beyond the “9” high, we were able to handle the final up thrust which was met with significant selling pressure.

The four red arrows point to the four candles that follow the candle labeled “9”. You would look to close the position at the end of the fourth candle.

Demark Indicators for MT4

Demark indicators are not included within the default indicator library of the MetaTrader 4 platform. As mentioned in the beginning of this lesson, Demark indicators are not readily available, so you may need to do some research and either find a free version online or purchase the indicator set from a MT4 programmer or other reliable source.

Conclusion

  • Tom Demark indicators are useful in analyzing the state and the heath of the current trend on the chart.
  • Two of the best Demark studies for trading are TD trendline and the TD sequential.
  • Tom Demark Trendlines:
    • The upper line is bearish, and it connects two recent and higher tops.
    • The lower line is bullish, and it connects two recent and lower bottoms.
    • The two lines act to squeeze the price action.
    • A signal comes when the price breaks one of these lines.
    • The signal is taken in the direction of the breakout.
    • You can target a level that marks a significant recent top or bottom.
  • Tom Demark Sequential:
    • Marks a series of sequential numbers above and below the candles based on 4 closes ago.
    • The reversal signal comes after the 9 th consecutive candle closes have each closed beyond the close of their respective candle four bars ago.
    • A sharp correction is likely to occur during the first four candles.

Listen UP.

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Forex Information: How to Draw DeMark Trendlines

When searching for Forex information on the internet you are likely to find articles relating to trendlines and trendline analysis.

Tom DeMark was a specialist in the field of technical market analysis and his best-selling book «The New Science of Technical Analysis» released in 1994 spells out some innovative techniques when it comes to the use of trendlines.

Much Forex information on the internet is of a general nature, and many articles are written about Forex by individuals who are not traders themselves. Tom DeMark on the other hand has had a long career with institutions trading stocks, futures, currencies and options.

His guidelines on the use of trendlines are very specific and they can be helpful to the newer trader who is searching for reliable Forex information on how to use standard indicators.

Here is a brief step-by-step description of how to draw DeMark trendlines.

Note: The terms swing high and swing low (also called cycle high and cycle low) refers to the following:

In an uptrend, a swing high is the wick of a candle that is higher than the wick of the candle to the left and right.

In a downtrend, a swing low is the wick of a candle that is lower than the wick of the candle to the left and right.

Obviously the more candles to the left and right that are higher in a swing low or lower in a swing high makes the swing or cycle more significant.

An uptrend is where price is making higher highs and higher lows. A downtrend is where price is making lower highs and lower lows.

Drawing DeMark Trendlines

Drawing Trendlines in an Uptrend

  1. Examine the bottoms of the candles on your chart and identify the most recent candle wick that is lower than the candle wicks to the immediate right and left of it.
  2. Look left on the chart, and identify the previous low candle that has candle wicks higher to the immediate right and left of it which is lower than the current low candle.
  3. Now draw a line from the current lowest candle to the previous lowest candle (drawing from right to left).
  4. Now take the end of the newly drawn line which stops at the current low candle and extend it forward some distance (drawing from the present position to the right).

Drawing Trendlines in a Downtrend

  1. Examine the tops of the candles on your chart and identify the most recent candle wick that is higher than the candle wicks to the immediate right and left of it.
  2. Look left on the chart, and identify the previous high candle that has candle wicks lower to the immediate right and left of it which is higher than the current high candle.
  3. Now draw a line from the current highest candle to the previous highest candle (drawing from right to left).
  4. Now take the end of the newly drawn line which stops at the current high candle and extend it forward some distance (drawing from the present position to the right).

You have now drawn a Tom DeMark trendline.

This can now be a reference point for future price action. It will often be observed that price will come and check this level. If it breaks through, it can mean a change in direction, the significance of which will depend on the time frame being used.

Trendlines drawn on 5-minute or 15-minute charts have much lesser significance than trendlines drawn on higher time frames such as the 1-hour, 4-hour, or daily.

Caution Required

Much Forex information extols the virtues of trendlines as an indicator of possible future price action.

Mr. DeMark certainly has made this a science and his detailed approach to drawing trendlines is certainly more accurate than just drawing general trendlines along the bottoms and tops of trends according to the way the eye sees.

However, trendlines in themselves do not indicate where high probability trades can be taken.

It is important to use a variety of indicators before pulling the trigger. Examining previous levels of support and resistance is probably far more significant in determining where price is likely to hesitate that watching trendlines.

However, they can be useful. If you find a key support or resistance level also coincides with a Fibonacci retracement or extension level which is also at an intersection with a trendline, then you have built a reasonably solid case for a trade.

Use this Forex information on DeMark trendlines wisely, with caution, and it can be another useful addition to the Forex day trader’s toolkit!

by Michael A. Jones

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