Thomas DeMark's Approach - Part I - Pivot Points and TD-Lines

The main merit of Thomas Demark was that he attempted to formalize many of the techniques of technical analysis, which are very difficult to describe in mathematical language, i.e. show a clear and unambiguous algorithm.

For example, it is difficult to formalize the right choice of points in the construction of trend lines. If you asked three experienced traders to build a trend line on the same chart, often you would get three completely different outlook on the market.

To resolve this uncertainty and ambiguity in the terms, Thomas DeMark made an attempt (and quite successfully) to formalize the process of technical analysis.

How to build a trend line: TD-points and the TD-line

The concept of "trend line" is often treated ambiguously and inconsistently. Unfortunately, in most cases, the procedure of trend line drawing is subjective. Many trend lines can be built, but only one is true.

Thomas DeMark has developed a methodology of objective selection of two points to build a TD-trend line (TD - reduction from the first letters of the technique author name). Application of this method resulted to technique of trend lines graphical analysis loses its former subjectivity and becomes a purely mechanical procedure.

The first thing that one has to abandon is drawing trend line from left to right. The current price movement is more important than price dynamics for previous days, so the trend line should be plotted from right to left, so that the right-hand side of the chart is the most recent data on the market's state.

Trend line drawn through these points is called TD-line and the points themselves - TD-points.

Supply price pivot point - a bar with a maximum price higher than the maximum prices of the previous and subsequent bars. Downward trend lines are drawn through the highs of such bars.

Demand price pivot points - this is a bar with a minimum price below the minimum price of the previous and subsequent bars. Upward trend lines are drawn through the minima of such bars.

To plot down the trend line, one has to reveal two TD-points consistently from right to left and draw trend line through them (Fig. 1).

Fig. 1. Example of construction of TD-line

    

There are criteria of truth for TD-points:

1. Demand price pivot point should be lower than the closing price of the two bars before it registered.

2. Supply price pivot point should be higher than the closing price of the two bars before it registered.

3. For Demand price pivot point the closing price of the next bar should be higher than the calculated rate of rise of TD-line (TD Line rate of advance).

4. For Supply price pivot point the closing price of the next bar should be lower than the calculated rate of fall of TD-line.

These criteria substantially reduce the number of TD-points and TD-lines, while significantly increasing their reliability.

Highs and lows registered without the applying of the criteria of truth TD-points are called "graphic" highs and lows. Highs and lows registered using these criteria are called "true" highs and lows.

TD-line of greater length

TD-line described in the previous section, are TD-lines of the first level (Level 1 magnitude). This means, to determine each TD-points used for their construction requires three bars. TD-line of the first level are of short-term nature, but often a trader wants to analyze the longer-term development of price movements. To do this, apply TD-line with a length of second, third level, etc.

TD-line of the second level (Level 2 magnitude) are drawn through TD-points, which are being formed by 5 bars: Supply price pivot point must be surrounded on each side by lower highs, while the demand price pivot point - by two higher lows.

Accordingly, for the construction of TD-line of the third level (Level 3 magnitude) for the registration of each TD-points it is necessary 7 bars and so on.

By definition, all TD-points of higher level are also TD-points of the lower level, but not all of them are "active" points of the first level, since only two most recent TD-points of the first level are active.

TD-line of higher level are treated the same as the TD-line of the first level.

1. However, T. Demark still advised to work only with TD-lines of the first level: 2. In the case of TD-line of higher level, waiting for the last TD-point formation increases

the probability of a trend line breakout before it is formed and the opportunity to open profitable position would be missed.

3. In the case of TD-line of higher level, waiting for the last TD-point formation increases the probability of an opposite signal (from lower level TD-line) is formed before price target is realized.

Thomas DeMark's Approach - Part II - Trendline Breakout Qualifiers

Trend line breakout validity evaluation

Trend line breakout validity evaluation - the first TD-breakout qualifier

After TD-line breaking trader is to determine the truth of a price breakout. Thomas Demark singled out three validity criteria of the breakout - TD Breakout Qualifiers. In this part I'll talk about first.

The first TD-breakout qualifier:

Downward breakout is true, if the closing price of the bar before the break higher the closing price of the preceding bar (Fig. 1). Upward breakout is true, if the closing price of the bar before the break lower the closing price of the previous bar.

Fig. 1. An example of applying the first TD-breakout qualifier

Trend line breakout validity evaluation - the second TD-breakout qualifier

The second TD-breakout qualifier is stronger than the first, so it justifies the opening position, even if the first TD-qualifier has shown that it is a false breakout.

The second TD-breakout qualifier:

Upward (downward) breakout is true if the opening price of the bar, which broke trendline, is higher (lower) the downward (upward) TD-line (Fig. 2).

Fig. 2. An example of applying the second TD-breakout qualifier

Trend line breakout validity evaluation - the third TD-breakout qualifier

Upward breakout is true, if the sum of the closing price on the eve of a breakout, and the difference between closing price and the lowest price on the same bar (or the closing price the two bars before the breakout, if it is lower) lower than the price break.

Downward breakout is true, if the difference between the closing price on the eve of a breakout and the difference between the highest price (or the closing price the two bars before the breakout, if it is higher) and the closing price on the same bar higher than the price break.

Fig. 3. An example of applying the third TD-breakout qualifier

After determining the truth of a breakout with the help of TD-qualifiers breakout before the trader gets the problem of determining price targets breakout, ie, to what levels will continue to move prices in the direction of the breakout

PRICE PROJECTIONS

Thomas DeMark's Approach - Part III - Price Projections

After determining a trend line breakout validity the trader stands in front of the problem of determining breakout's price targets, i.e., to what are the levels the price will continue to move to after the breakout.

What is the target after the trend line breakout: the first TD-price projector

After determining a trend line breakout validity the trader stands in front of the problem of determining breakout's price targets, i.e., to what are the levels the price will continue to move to after the breakout.

There are three methods for calculating the price projections after the true trend line breakout. They are called TD-Price Projectors (Fig. 1).

TD-Price Projector 1 has the lowest accuracy, but easy to calculate:

In the case of upward breakout price projector 1 is calculated as follows: the distance from the lowest price below the TD-line to a price point on the TD-line directly above it is added to the price at the point of TD-line breakout.

In the case of downward breakout price projector 1 is calculated as follows: the distance from the highest price above the TD-line to a price point on the TD-line directly under it shall be deducted from the price at the point of TD-line breakout.

Fig. 1. Price projections show Demark's guidance of price movement after a trend line breakout

What is the target after the trend line breakout: the second TD-price projector

TD-Price Projector 2 is calculated by analogy with the first, but not the lowest price is chosen in case of upward breakout (the highest price in case of downward breakout), but the lowest (highest) price of under (above) TD-line at the bar with the lowest (highest) closing price. Then, this value is added to the price of a breakout in the case of upward breakout and deducted in case of downward breakout. Very often price projector 1 and price projector 2 coincide.

Fig. 1. Price projections show Demark's guidance of price movement after a trend line breakout

What is the target after the trend line breakout: the third TD-price projector

TD-price projector 3 is the most conservative:

At the upward (downward) TD-line breakout the projection is calculated as the difference between the TD-line and the closing price below it (above it) at the bar when the lowest (highest) value of the price has been registered.

Fig. 1. Price projections show Demark's guidance of price movement after a trend line breakout

Sometimes the price projections are not met. It happens usually as a result of the following two events:

• A new signal occurred as a result of an oppositely directed TD-line breakout. In this case, the old signal is replaced with a new one, and price targets are canceled.

• TD-line breakout signal was false. Usually this becomes clear when the next bar after the breakout closes below (above) the downward (upward) TD-line.

Thomas DeMark's Approach - Part IV - Demarker Indicator

How to determine the strength of the trend: The indicator of Demark (Demarker Indicator)

How to determine the strength of the trend: The indicator of Demark (Demarker)

The formula for DeMarker Indicator is:

Calculating DeMax (i).

If HIGH (i) > HIGH (i - 1), DeMax (i) = HIGH (i) - HIGH (i - 1), otherwise DeMax (i) = 0.

Calculating DeMin (i).

If LOW (i) < LOW (i - 1), DeMin (i) = LOW (i - 1) - LOW (i), otherwise DeMin (i) = 0.

Calculating value of the DeMarker - DMark (i):

DMark (i) = SMA (DeMax, N) / (SMA (DeMax, N) + SMA (DeMin, N)).

Where: HIGH (i) - the highest price of the current bar;LOW (i) - the lowest price of the current bar;HIGH (i - 1) - the highest price of the previous bar;LOW (i - 1) - the lowest price the previous bar;SMA - simple moving average;N - number of periods used for the calculation.

Thus, the DeMarker Indicator based on the following comparisons: if the maximum of the current bar is higher than the maximum price of the previous bar, then the corresponding difference is recorded. If the maximum price of the current bar is equal to or below the maximum of the previous bar, then register a zero value. Then, the differences obtained for the period are summarized. The resulting number becomes the numerator of the Demark Indicator and divided by the same value plus the sum of the differences between the minimum prices of the previous and the current bars for the period.

The DeMarker Indicator is in the range between 0 and 1. Indicator values between 0.7 and 1 form overbought zone, and between 0 and 0.3 - oversold.

Signals of Demarker Indicator:

1. Bullish Divergence / Bearish Convergence - the main signal indicating the weakness of the current trend (Fig. 1).

2. In a flat market exiting overbought (oversold) zone is a signal to sell (buy).

Fig. 1. An example of a DeMarker Indicator bearish convergence.

How to determine the strength of the trend: Overbought / oversold

Thomas Demark singled out two overbought or oversold conditions: extreme and moderate.

Extreme overbought (oversold) occurs when the indicator is in the overbought (oversold) zone more than 5 bars.

Moderate overbought (oversold) occurs when the indicator is in the overbought (oversold) zone less than 5 bars.

If the indicator, fixing the state of the moderate overbought (oversold), came from this area, we expect the bearish (bullish) price reversal.

Exiting the overbought (oversold) zone, after the state of extreme overbought (oversold), as a rule, does not lead to a price reverse. Often, the indicator should come to this area again, fix the state of the moderate overbought (oversold) and a bullish divergence / bearish convergence and leave the area. Only after this trend reversal is possible.

Thomas DeMark's Approach - Part V - Sequential Mechanical Trading System

Sequential - Demark's mechanical trading system

Sequential is a mechanical trading system, developed by Thomas Demark. It consists of several stages:

Setup building intersections cowntdown entry into the market closing the position

Setup

Any signal on this trading tactic begins with the formation of setup to buy or sell.

It is assumed that the setup to buy (sell) is formed, if for at least nine consecutive bars closing prices were lower (higher) than the closing price four bars before for each bar of the sequence.

In the setup there must be at least nine bars.

Intersection

Intersection is the process of determining the truth of the setup.

For the setup to buy (sell) the intersection occurs when the high (low) price of the eighth or ninth bar will be higher (lower) or equal to the low (high) price of third, fourth, fifths, sixth or seventh bar.

If the intersection at the eighth or ninth bar did not happen, the next phase of the "countdown" is postponed until the moment when the intersection does take place. That is, one should wait for the next bar, at which the intersection of the corresponding bars happens.

Setup is canceled in two cases:

1. Loop (discussed below); 2. If one of the subsequent closing prices will be higher than the highest price in the buy

setup or lower the lowest price in the sell setup.

Countdown and the opening position in the sequent - Demark's mechanical trading system

Countdown

When the setup intersection is happened (but not before the ninth bar of the setup), begins the process of countdown.

For sell (buy) setups countdown reflects the ratio between the closing price and the high (low) price of two bars ago. The closing price must be higher (lower) than highest (lowest) price of two bars ago. As soon as the recorded 13 such prices (not necessarily consecutive), signal occurs.

Countdown phase cannot be completed earlier than 12 bars after the setup (it is assumed that the ninth bar also includes a phase reference), but usually there are 15 to 30 bars between the setup and countdown completion.

Countdown and the setup are cancelled in two cases:

Opposite direction setup has been formed There is a "loop", i.e., a new setup in the same direction.

Entering the market (Entry)

There are three ways to open a position:

at the closing price of the bar, which completed the countdown. This is the most risky way, since a loop can happen. after a "flip": in buy (sell) case, the closing price must be higher (lower) the closing price four bars ago; after 2-bar "jump": in buy (sell) case, the closing price must be higher (lower) than the maximum (minimum) price two bars ago.

The third way is a compromise between the first and second

Sequential: closing the position

To determine the Stop Loss levels the author used the true price range of the day with the lowest minimum (highest maximum) for the entire period of setup and countdown formation for the buy (sell) signal.

There are two methods of exit by Stop Loss:

1. The true range is calculated as follows: a bar's low price is subtracted from the bar's high price or from the closing price of the previous bar, if the latter is higher. In the case of a signal to buy (sell) Stop Loss level is determined by subtracting (adding) the obtained value from the low (high) price of the bar.

2. More conservative is the second method. Bar for the calculation of Stop Loss is chosen the same way. However, when buying a Stop Loss level is determined by subtracting difference between the closing price and the low price from the low price, in sell case the Stop Loss is determined by adding difference between the high price and closing price to the high price.

Since the trader entering the market, expects to receive profit, it is important to determine the target profit levels in the case of a favorable price movement.

There are two ways to exit the market at a profit:

1. a new setup formation is completed and price fails to reach the extreme price level recorded during the formation of the nearest non-active setup

2. There is a trend reverse signal

Sequential is successfully used not only on the daily charts, but the author is advised to apply it only at this time interval.

Technical Analysis: Part 2 – Trading on the News is Popular in All Markets

In Part 1 of this series, we discussed the basics of what Technical Analysis is and how it can help both a short-term and long-term investor to optimize his entry and exit points in any market, whether for securities, commodities, or foreign exchange.

The flexibility of technical analysis is that knowledge gained in these disciplines can be applied across markets and time frames as well. The principles hold in each circumstance, but the effectiveness of the "tool" is directly proportional to the experience of the user.

These tools are the same as with any craft – practice makes for better application, and a variety of tools may be the best solution for a specific application whether it involves purchasing a stock or riding a healthy upward trend in the currency market. For the latter activity, forex brokers provide what are known as free demo accounts for devoting hours to practicing and refining your forex trading strategy with "virtual" cash and real-time currency quotes. In forex trading, the confluence of both fundamental and technical analysis also converges to produce one of the most popular trading strategies there is, trading on the news.

Government agencies the world over release important economic data on a daily basis, most often tied to published schedules. These releases often move our financial

markets due to their financial significance, and no where more dramatically than in our currency markets. Foreign exchange rates are the "fulcrum" between two competing global economies and measure the market’s balanced appraisal of the relative health and strength of each compared to one another. Trading in currencies is all about speculation and finding healthy trends that build for hours. (It should be noted that Forex trading is risky and not suitable for all investors. Since currency trading is a speculative activity you should never risk funds that you cannot afford to lose.)

In that regard, trading on news releases offers an opportunity that can be anticipated and planned for in advance. Although each data release may move markets to varying degrees, based on current or previous trends and the current focus in the marketplace, the following five release types deserve their fair share of attention:

1. Interest rate decisions by the Central Bank 2. Retail sales figures 3. Inflation (consumer price or producer price) 4. Unemployment 5. Industrial production and GDP releases

At present, employment data tends to be the major market mover, and from a currency perspective, the "GBP/USD" currency pair tends to react more than other heavily traded pairs to this type of release. On the first Friday of every month, the Department of Labor in the United States release it non-farm payroll data for the previous month at 8:30 EST. The event is much anticipated, and the chart above from the January 2011 release indicates the reason for the attraction – a healthy trend is nearly always the result.

In this case a "130-pip" trend, as opposed to an average "40-pip" opportunity at any other time, developed over two hours after analysts had time to assimilate the report and form an opinion about its contents. Armed with this knowledge, the forex trader need not predict the final direction of the trend, but he does need to enter a position after the direction has materialized. Technical analysis provides the tools to achieve this objective as presented in Part 1 of this series. In this example, timeframes may be in the minutes, but on the chart from Part 1, we can see that this release led to a weakening trend in the Dollar that lasted for a few days, indicated by the "blue" oval:

For investors and traders alike, a basic understanding of Technical Analysis can lead to more effective entries and exits in all markets.

Upward sloping TD line =support

Downward sloping TD line = Resistance

Sab right to left ki taraf baney gi trendline