CURRENCY STRATEGIES

Currencies have long been praised for their capacity

to trend, but in today’s market, an objective
countertrend technique might be a forex trader’s
most valuable asset. TD Sequential is designed to
identify trend exhaustion points and keep you one
step ahead of the trend-following crowd.

Countertrend forex trading

with TD SEQUENTIAL
1 2
BY TOM DEMARK AND ROCKE DEMARK 4
2 3 5
1

T here is a market adage that describes the modus operandi of almost

all currency traders: “The trend is your friend.”
Granted, that is often the case. However, to make it more truthful, we have
added the corollary “unless the trend is about to end.” This qualifier has never
9
11
12
13

been more appropriate for the forex market than in recent times.
Markets will trend, but research proves this is the exception rather than the 8 9
8
rule. Overall, markets trend 25 to 30 percent of the time, which means 70 to 75 7
percent of the time they move within defined trading ranges. 10
Historically, currency markets were more likely to trend than traditional
commodities, financial, or stock markets because policy decisions made by 7
central banks were coordinated, and these collective actions influenced cur- 6 6
rency relationships for extended periods of time. In recent years, however, 5
5
that interdependency has diminished and currency price behavior has mim- 4
icked that of other conventional markets. 4
Psychologically, it is simple to buy an advancing market and sell a declin- 3
ing market. Most traders attempt to operate in harmony with the trend, and
the news associated with such price movement serves to reinforce that ten- 3
dency and provide an excuse for its perpetuation. This is simply human 2
nature –– all of us want to be on the side of a winner, and the news accompa- 1
nying a trend is written to justify its existence. Eventually, however, the trend
exhausts itself and, almost by default, it is reversed or, at least, interrupted.
Typically, stock specialists, market makers and brokerage trading desks
supply needed liquidity by positioning themselves against the prevailing
trend. Their collective countertrend activities are responsible for price exhaus-
tion periods.
continued on p. 30

28 January 2005 • CURRENCY TRADER

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7
12
6
5
13
4
11
9
9
6 10 1
8 3 2
7 1
8
5 2

7
4 5
6 3
2 3 6
4
9

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8

1
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CURRENCY TRADER • January 2005 29

 CURRENCY STRATEGIES continued

Professional traders subsequent price bar’s low must be

less than the lows of both Setup bars 6
S everal currency strategists and traders specialize in applying TD Sequential
and other TD indicators to the currency markets. and 7. Until that occurs, the anticipat-
One is Jason Perl, Global Head of the Fixed Income, Rates and Currency ed price “hiccup,” or reaction, is less
Technical Strategy Group at UBS Investment Bank. He has been using these likely to occur.
studies for the past 10 years –– identifying, among other events, the USD/JPY A sell Setup is a series of at least nine
top in 1998, the U.S. bond highs in June 2003 and March 2004, the April 2004 consecutive closes greater than the
Nikkei high and the May 2004 EUR/USD low, using TD Sequential. close four price bars earlier. Prior to the
Kurt Magnus, head of foreign exchange sales at WestPac Bank, has given
first bar of this series, a TD Price Flip
numerous seminars on these indicators, as have Bloomberg trading specialists
must occur to initialize the Setup –– i.e.,
Doug Tengler, Terry Gaut, Paul Salerno, Roderick Bentley, Brendan Scholey,
Trevor Neil, Greg Byrnes and David Keller. Other contributors include: from CQG the close of the bar immediately before
Inc., Stan Yabroff in the U.S. and Shaun Downey in London; from Thomson bar No. 1 of the prospective sell Setup
Financial, Phil Doyle and John Kozey; from Morgan Stanley, Rick Bensignor, must be less than or equal to the close
head of technical research; Ed Solari, Senior Technical Strategist at the Bank of four price bars earlier. If the Setup
Montreal; Paul Day at HSBC; Kevin O’Dowd at Legg Mason; Tim McCullough at series is interrupted at any time prior to
West LB AD; Lindsay Glass, Blake Bertea and Steve Shirley from Oppenheimer; completion, the bar numbers are erased
Chuck Gall from RBC; Dain Rauscher; and from UBS Gerald Chan and Robert and the process must start again.
HY Lam. Typically, when a sell Setup is com-
—Tom DeMark pleted and perfected, price has a ten-
Check out next month's issue for insights on TD Sequential from some of these
dency to at least react to the downside
market professionals.
or move sideways for a while. A sell
Setup is perfected when either the high
of Setup bar 8, the high of Setup bar 9 or
A tool for identifying the ends high or low two periods earlier. a subsequent price bar’s high is greater
of trends than the highs of both Setup bars 6 and
TD Sequential is designed specifically Buy and sell Setups 7. Until that occurs, the anticipated
to predict potential price exhaustion Buy Setup is a series of at least nine price reaction is less probable.
and likely price reversals. This consecutive closes less than the close
methodology is designed to become four price bars earlier. Prior to the first Countdown
progressively less bearish as price bar of this series, proper “initializa- Buy Countdown begins when a buy
declines and, conversely, less bullish as tion” must occur in the form of a TD Setup has completed (once the mini-
price advances, contradicting the Price Flip. This means the close prior mum requirement of nine consecutive
behavior of most trend-following to setup close No. 1 must be greater closes less than the close four days ear-
traders. than or equal to the close four price lier is fulfilled). Beginning on the ninth
TD Sequential provides much-need- bars earlier; only then can the buy Setup bar, a process is applied that
ed discipline and removes the emotions Setup process begin. (Note: For cash compares the close of that price bar vs.
associated with trend trading. It also currency markets, use the New York the low two bars earlier: If the close is
gives a distinct edge to traders who close, which is 10 p.m. London time, as less than or equal to the low two price
operate in size, allowing them to buy the end of the trading day.) bars earlier, then a Countdown is
when supply is most plentiful and to Once a minimum of nine consecu- recorded.
sell when demand is most aggressive. tive closes less than the corresponding Just as a buy Setup series’ bars are
Markets move in impulses or waves. closes four price bars earlier are ful- numbered, so too are bars in a
No move, either up or down, is unin- filled, these bars are numbered 1 Countdown, except in a different color.
terrupted. There is a natural rhythm or through 9. If that series is interrupted Once 13 valid Countdown bars have
cadence associated with price move- at any time prior to completion, the occurred (note: Countdown bars do not
ment in any market. This is apparent count is erased and the process must have to be consecutive), the downside
on any time frame, from one-minute to begin anew. price momentum is likely to be
monthly. This rhythm can be measured Typically, when a buy Setup is com- exhausted. Additionally, to ensure the
and followed according to the tenets of pleted and “perfected,” price has a ten- price action is sufficiently low relative
TD Sequential, which has two compo- dency to at least react to the upside or to the prior price action, the following
nents: 1) TD Setup, which is momen- move sideways –– i.e., after a con- qualifier is used: The low of buy
tum-based and compares the closing firmed Setup, the prevailing down- Countdown bar 13 must be less than or
price with the close four periods earlier trend corrects for a period of time. To equal to the close of Countdown bar 8.
and, 2) TD Countdown, which is trend- “perfect” a buy setup, either the low of There are two events that cancel a
based and compares the close with the Setup bar 8, the low of Setup bar 9 or a buy Countdown prior to completion:

30 January 2005 • CURRENCY TRADER

FIGURE 1 — BRITISH POUND
After the sell Setup series (green numbers) that completed in late May 2004, the pound’s upward momentum was interrupted
for two weeks.
British pound (GBP), daily

13 1.88
12
11
10 7
89 6 8 9
45 1.86
7
3 1
78 3 56
2 1.84
9 1 12
4
3
2
45
6 1
3 1.82
5 6 2
7 9 4
6 78
8 5
5
3
3 12 4 1.80
4 ++
12
67
+ ++ 1.78
89 1112 13
10
1.76

1.74
10 17 24 1 8 15 22 1 8 15 22 2 9 16 23 1 8 15 22 1 8 15
May 2004 June 2004 July 2004 August 2004 September 2004 October 2004
Source: Bloomberg, Inc.

The first occurs if, subsequent to the Because of additional selling from a close greater than or equal to the close
completion of a buy Setup, a price new group entering the market, a four price bars earlier — the
bar’s low and the prior price bar’s downtrend will unexpectedly intensi- Countdown process will “Recycle”.
close are both above the highest price fy from time to time. If the selling Sell Countdown inverts the rules for
of the entire buy Setup series. In these becomes sufficiently intense for an a buy Countdown: It begins once the
instances, the buy Setup is cancelled extended period of time to produce a minimum sell Setup requirement of
and you must begin to look for a new new buy Setup that extends past the nine consecutive closes greater than
Setup series. The second cancellation minimum nine to at least 18 consecu- the close four bars earlier is fulfilled
occurs when a contradictory sell Setup tive closes less than the close four bars for a sell setup. Beginning on bar 9 of
appears before the completion of the earlier — prior to the completion of the the Setup, a series of closes (which do
Countdown. Countdown or prior to a subsequent not have to be consecutive) greater
than or equal to the high two price
bars earlier must occur. The rules for
Historically, currencies have tended to trend because cancelling a sell Countdown are
inverted as well.
coordinated policy decisions by central banks On the daily time frame, completed
Countdown “13s” coincide with a mar-
influenced currency relationships for extended ket’s top or bottom approximately four
or five times a year. On shorter time-
periods of time. In recent years, however, that frame charts, the number of Countdown
13s will increase commensurately.
interdependency has diminished and currency price
Trading forex with TD
behavior has mimicked that of other markets. Sequential
The following daily charts illustrate
continued on p. 32

CURRENCY TRADER • January 2005 31

 CURRENCY STRATEGIES continued

FIGURE 2 — EURO
Although both the sell Countdown in early January and the buy Countdown in mid May marked trend reversals, price tested
the 13 price level in each case and then made secondary Setup 9 series.

Euro (EUR), daily

23 1.300
9 1
78 789
12
13 6 1.280
5
11 4
10 9 6
68 3 1 5
4
97 1 2
85 2 1.260
67 4 123
5123 5
36
131234 4
12 9 1.240
11 78
910
889 1
7
7
66 3
55 1 3 2 1.220
44
3 4
3 5 6 45
2 2
1 6
12 789 1.200
7

8
9 12
10
11 13 1.1800

24 1 8 15 22 1 8 15 22 2 9 16 23 1 8 15 22 1 8 15 22 3 10 17 24 1 8 15 22 1 8 15 22 2 9 16 23 1 8 15 22 1 8 15 22 1
Dec. 2004 Jan. 2004 Feb. 2004 March 2004 April 2004 May 2004 June 2004 July 2004 August 2004 Sept. 2004 Oct. 2004
Source: Bloomberg, Inc.

the application of TD Sequential to
cash currency trading.
Figure 1 (see p. 31) of the cash
British pound (GBP/USD) shows a sell
Setup series (green numbers) that com-
pleted in late May 2004; the red arrow
above the “9” indicates the sell Setup
was “perfected.” Notice the upside
progress was interrupted for 11 trad-
ing days after this bar, as price moved
sideways and then declined.
The Countdown process then
began, with the qualifying bars labeled
Operating against the trend is often difficult because
it contradicts human nature.
with red numbers. The peak of the
rally was marked by a Countdown
“13” and exhausted the upside for this
market.
Notice another sell Setup devel-
oped simultaneously with this
Countdown (the second series of green
numbers, below the red Countdown
numbers). This sell Setup was not per-
fected until the high close (day 12 of
the Countdown) because days 8 and 9
of the sell Setup were below Setup day
7, and the high of Setup day 7 was not
exceeded until two days after the sell
Setup day 9, which happened to be the
Countdown “12” day, and the highest
close of the rally.
In late July a buy Setup was perfect-
ed on day 8; a short-term rally ensued,
followed by a buy Countdown. Note
the Countdown 12 bar appeared in
mid September, followed by five aster-
isks before the Countdown 13 bar
occurred. Each asterisk day would
have been a “13,” but that designation
was deferred because the lows of these
bars were not as low or lower than the
close of Countdown bar 8. Once a
valid Countdown 13 bar occurred,
however, downside pressure subsided
and the market rallied.
Figure 2 of the euro/U.S. dollar
(EUR/USD) illustrates a sell
Countdown in early January and a buy
Countdown in mid-May. Although
both Countdown 13s marked trend
reversals, price tested the 13 price level
in each instance and then recorded sec-
ondary Setup 9 series. Both Setup 9
series were perfected, which served to
reinforce the original 13’s.
Also, the Setup 9/Countdown
13/Setup 9 series that completed at the
late-July bottom was particularly inter-
esting because it defied conventional
technical wisdom, which at that point
interpreted the trend as bearish on the
daily, weekly and monthly time frames.
In October, another perfected Setup 9
appeared that stalled the uptrend for a
few days, after which the market
entered the Countdown process.
In Figure 3 of the Australian dol-
lar/New Zealand dollar cross rate
(AUD/NZD), four of the five Setup
series have arrows that coincide with

32 January 2005 • CURRENCY TRADER

FIGURE 3 — AUSTRALIAN DOLLAR/NEW ZEALAND DOLLAR
The two Countdown 13 bottoms were immediately followed by profitable upside price moves.

Australian dollar/New Zealand dollar (AUD/NZD), daily

1.180

12
3
1.160
4
5 78
6
9
1.140
1
12 3
234
45 5 78
6 9 1.120
6 45 34
6 9 3 5
7 1 1
78 12 2 2
8 1
9
34 5678 1.100
910 5
11 13 6
12 78 9 4
1
1.080
23 3
45 9 10 12
11
6
12
13 1.0600
78

15 22 3 10 17 24 1 8 15 22 1 8 15 22 2 9 16 23 1 8 15 22 1 8 15 22 1 8 15 22 1
April 2004 May 2004 June 2004 July 2004 August 2004 September 2004 October 2004 November 2004
Source: Bloomberg, Inc.

either a short-term price reversal or

price consolidation. The two Count-
down 13 bottoms had immediate
upside price responses that proved to
be profitable moves.
Forecasting trends instead of
following them
The advantage of using TD Sequential
instead of conventional trend-following
methods is that you can buy into weak-
ness and sell into strength (and do so in
size). When following trends, entry
competition produces slippage and
price gaps that cut into performance.
Operating against the trend is often
difficult because it contradicts human
nature. However, these examples show
there are distinct advantages to doing
so, and TD Sequential is an indicator
designed specifically to accomplish
this goal. 
Related reading
“Tom DeMark: Objectively speaking”
Active Trader, November 2001.
An extended interview with Tom DeMark.
“Demarking trend exhaustion zones”
Active Trader, July 2002.
This article illustrates how to use Tom DeMark’s TD Sequential and TD
Combo indicators to identify trend-exhaustion zones.
“Absolute price projections”
Active Trader, July 2004.
Tom DeMark applies objective price projection tools to historical price
examples results to generate a stock market a forecast.
“DeMark variation”
Active Trader, September 2001
This is a Trading System Lab based on a simple pattern, named TD Carrie,
described by Tom DeMark in his book New Market Timing Techniques.

For information on the author see p. 8. You can purchase past articles online at www.activetradermag.com/pur-
chase_articles.htm and download them to your computer.
TD Sequential, TD Setup, TD Countdown
and TD Price Flip are registered trade-
marks.

CURRENCY TRADER • January 2005 33