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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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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