The sequential methodology of Tom DeMark or TD Sequential is a well-known indicator among traders that operate based on the techniques of this author, which has become known in recent years. In fact, this indicator is a mixture of a bit of everything, so it will be liked by both systematic traders and lovers of technical analysis, including those who like wave counts.
To calculate the TD Sequential, three phases are required:
Phase I: Pattern formation
- First we will have a buy signal in case there are 9 price bars with consecutive closures that meet the condition of being all lower than the closing price of four sessions ago.
- Likewise, the closing that preceded the first of the 9 closures must be greater or at least equal to the closure of four sessions ago.
- The sell signal will be produced if there are 9 bars with consecutive closures greater than the closure produced about 4 sessions ago. In addition, the closing price preceding the first of the 9 closures has to be less or at least equal to the close of about 4 sessions ago.
Phase II: The countdown
Once the pattern has been completed, the signal must be confirmed for which in the case of the buy signal, it is necessary to wait for 13 closures, all of them smaller than the closure produced 2 sessions ago. Already in this phase, it is not essential that these closures be consecutive since otherwise, it would practically not be possible to find any signal that is based on the TD Sequential.
Confirmation of the sell signal occurs when the opposite is observed, that is when there are 13 closures greater than the closing of 2 sessions ago. In this case, it is not necessary that those 13 closures be consecutive.
Phase III: Position opening
After both the price pattern and the countdown have been verified, Tom DeMark advises the following ways to open the position enter the market:
- The position is opened directly once the thirteenth bar that serves as confirmation to the countdown is closed. This constitutes the most aggressive form and the one that logically entails greater risk for the trader, but at the same time, it allows to approach either the maximum or the minimum of the market before it changes direction.
- We can also buy once there is a close above the close of four sessions ago, once the countdown has been completed. In the case of short trades, we can sell once there is a close below the close of four sessions ago, once the countdown has been completed. In this case, even if the entry occurs somewhat later, we can confirm the market turn with greater certainty.
- Finally, another way to enter the market would be to buy once there is a close above the maximum of two sessions ago once the countdown is completed. For short trades, the position is opened once there is a close lower than the minimum of two sessions ago.
DeMark also establishes a series of rules that allow the trader to increase the reliability in the signals provided by the previous patterns, which he calls refinement.
Thus, for buy signals, it is best that during the pattern formation, bars 8 or 9 must have a minimum lower than the minimums of bars 6 and 7. Also in the countdown, the minimum of the bar 13 must be less than or at least equal to the minimum of the bar 8.
For sell signals, the ideal is that in the course of the pattern formation the maximum of the eighth or ninth bar must be greater than the maximums of both bar 6 and bar 7. On the other hand in the countdown, the maximum of the bar 13 must be greater or at least equal to the closing of the bar 8.
To better understand what the TD Sequential consists of, you can study the following example where a price chart of the GBP/USD is shown with various sequences represented:
In this case, the green coloring numbers that appear on each bar indicate the phase I count. The first red arrow that is placed over 9 indicates that the phase I pattern has finally been completed. It is from this bar where the countdown begins, which is marked with red coloring numbers. At the precise moment when the candle 13 is reached, the TD Sequential tells the trader that the previous bullish movement has concluded, so he can open a sell position. You can see how a new sell pattern has been formed at the same time as the countdown was made, which in this case is the second series of green numbers.
Following the previous example, it can be observed that at the end of July, a possible buy pattern is produced (in the third series of green numbers) which is subsequently followed by a countdown formed by the second series of red numbers which serves to confirm it. However, in this case, some bars that maybe number 13 have been marked with a cross since they do not meet the restrictions to increase the reliability of the formation described by DeMark. Finally, the bar that has been marked as 13 does fully comply with the normal requirements of the methodology, that is, its closure is below the price closure of two bars ago.
At the same time, this bar complies with the restrictions since its minimum is lower than the minimum of bar 8 and therefore there is a clear buy signal. So far the DeMark trading technique has been analyzed in its pure state and without much complication and as you can see there is no magic oscillator or special trend lines, only what is called “market timing” to obtain supports and pure resistances. If this strategy is combined with adequate money and risk management, it can be quite profitable, especially for those position traders who want to include it in their trading arsenal and have the patience to wait for two sequences to complete to execute the buy/sell order at the right time.