This action might not be possible to undo. Are you sure you want to continue?
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
BY TOM DEMARK AND ROCKE DEMARK
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 been more appropriate for the forex market than in recent times. Markets will trend, but research proves this is the exception rather than the rule. Overall, markets trend 25 to 30 percent of the time, which means 70 to 75 percent of the time they move within defined trading ranges. Historically, currency markets were more likely to trend than traditional commodities, financial, or stock markets because policy decisions made by central banks were coordinated, and these collective actions influenced currency relationships for extended periods of time. In recent years, however, that interdependency has diminished and currency price behavior has mimicked that of other conventional markets. Psychologically, it is simple to buy an advancing market and sell a declining market. Most traders attempt to operate in harmony with the trend, and the news associated with such price movement serves to reinforce that tendency and provide an excuse for its perpetuation. This is simply human nature –– all of us want to be on the side of a winner, and the news accompanying 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 exhaustion periods.
continued on p. 30
13 12 11
9 8 9 8 7 10 7 6 6 5
5 4 4 3 3 2 1
January 2005 • CURRENCY TRADER
9 7 12 6 5 13 11 9 9 6 7 8 5 7 4 3 4 9 7 10 8 1 2 4 8 3 1 2 5 6 6 2 3 8 1 3 2 CURRENCY TRADER • January 2005 29 .
head of foreign exchange sales at WestPac Bank.e. London time. 1 must be greater than or equal to the close four price bars earlier. the bar numbers are erased and the process must start again. No move. Other contributors include: from CQG Inc. Dain Rauscher. Until that occurs. Stan Yabroff in the U. This means the close prior to setup close No. either the low of Setup bar 8. the U. as the end of the trading day. Prior to the first bar of this series. the anticipated price reaction is less probable. Kurt Magnus. Trevor Neil. This is apparent on any time frame. 2) TD Countdown. (Note: For cash currency markets. Beginning on the ninth Setup bar. Blake Bertea and Steve Shirley from Oppenheimer. these bars are numbered 1 through 9. head of technical research. which is momentum-based and compares the closing price with the close four periods earlier and. less bullish as price advances.m. the downside price momentum is likely to be exhausted. the prevailing downtrend corrects for a period of time. use the New York close. Tim McCullough at West LB AD. from one-minute to monthly. If the Setup series is interrupted at any time prior to completion. Until that occurs. Brendan Scholey. There are two events that cancel a buy Countdown prior to completion: January 2005 • CURRENCY TRADER . Chuck Gall from RBC. either up or down. using TD Sequential. proper “initialization” must occur in the form of a TD Price Flip.” price has a tendency to at least react to the upside or move sideways –– i. the low of Setup bar 9 or a subsequent price bar’s low must be less than the lows of both Setup bars 6 and 7. This methodology is designed to become progressively less bearish as price declines and. Paul Salerno. to ensure the price action is sufficiently low relative to the prior price action. the USD/JPY top in 1998. Terry Gaut. price has a tendency to at least react to the downside or move sideways for a while. There is a natural rhythm or cadence associated with price movement in any market. which has two components: 1) TD Setup. If that series is interrupted at any time prior to completion. Markets move in impulses or waves. A sell Setup is a series of at least nine consecutive closes greater than the close four price bars earlier. —Tom DeMark Check out next month's issue for insights on TD Sequential from some of these market professionals. is less likely to occur. as have Bloomberg trading specialists Doug Tengler. is uninterrupted. Greg Byrnes and David Keller. Rates and Currency Technical Strategy Group at UBS Investment Bank. the high of Setup bar 9 or a subsequent price bar’s high is greater than the highs of both Setup bars 6 and 7.. then a Countdown is recorded. the following qualifier is used: The low of buy Countdown bar 13 must be less than or equal to the close of Countdown bar 8. when a buy Setup is completed and “perfected. bond highs in June 2003 and March 2004. among other events. after a confirmed Setup. the anticipated price “hiccup. contradicting the behavior of most trend-following traders. a TD Price Flip must occur to initialize the Setup –– i. Rick Bensignor. A tool for identifying the ends of trends TD Sequential is designed specifically to predict potential price exhaustion and likely price reversals. from Thomson Financial. Global Head of the Fixed Income. Prior to the first bar of this series.e. Senior Technical Strategist at the Bank of Montreal. only then can the buy Setup process begin. Kevin O’Dowd at Legg Mason. Ed Solari. and Shaun Downey in London. a process is applied that compares the close of that price bar vs. Paul Day at HSBC.S. which is trendbased and compares the close with the 30 high or low two periods earlier. the count is erased and the process must begin anew.S. This rhythm can be measured and followed according to the tenets of TD Sequential.) Once a minimum of nine consecutive closes less than the corresponding closes four price bars earlier are fulfilled. from Morgan Stanley. conversely. so too are bars in a Countdown. 1 of the prospective sell Setup must be less than or equal to the close four price bars earlier. when a sell Setup is completed and perfected. A sell Setup is perfected when either the high of Setup bar 8. Just as a buy Setup series’ bars are numbered. allowing them to buy when supply is most plentiful and to sell when demand is most aggressive. He has been using these studies for the past 10 years –– identifying. Lindsay Glass. and from UBS Gerald Chan and Robert HY Lam. Once 13 valid Countdown bars have occurred (note: Countdown bars do not have to be consecutive). the low two bars earlier: If the close is less than or equal to the low two price bars earlier. Typically.” or reaction. the close of the bar immediately before bar No. Countdown Buy Countdown begins when a buy Setup has completed (once the minimum requirement of nine consecutive closes less than the close four days earlier is fulfilled). One is Jason Perl.CURRENCY STRATEGIES continued Professional traders and traders S everal currency strategists the currency specialize in applying TD Sequential and other TD indicators to markets. which is 10 p. except in a different color. Buy and sell Setups Buy Setup is a series of at least nine consecutive closes less than the close four price bars earlier.. Phil Doyle and John Kozey. Typically. To “perfect” a buy setup.. has given numerous seminars on these indicators. TD Sequential provides much-needed discipline and removes the emotions associated with trend trading. Roderick Bentley. Additionally. the April 2004 Nikkei high and the May 2004 EUR/USD low. It also gives a distinct edge to traders who operate in size.
a downtrend will unexpectedly intensify from time to time. On the daily time frame. Because of additional selling from a new group entering the market. CURRENCY TRADER • January 2005 close greater than or equal to the close four price bars earlier — the Countdown process will “Recycle”.82 3 12 1.86 1 78 9 1 2 3 4 56 12 1. however. British pound (GBP). Beginning on bar 9 of the Setup. In recent years. currencies have tended to trend because coordinated policy decisions by central banks influenced currency relationships for extended periods of time. that interdependency has diminished and currency price behavior has mimicked that of other markets. a price bar’s low and the prior price bar’s close are both above the highest price of the entire buy Setup series.88 11 10 7 89 6 8 9 45 7 3 1. The rules for cancelling a sell Countdown are inverted as well. 32 31 . a series of closes (which do not have to be consecutive) greater than or equal to the high two price bars earlier must occur. Inc. In these instances.80 4 67 89 10 12 11 ++ + ++ 13 1. subsequent to the completion of a buy Setup. If the selling becomes sufficiently intense for an extended period of time to produce a new buy Setup that extends past the minimum nine to at least 18 consecutive closes less than the close four bars earlier — prior to the completion of the Countdown or prior to a subsequent Historically. daily 13 12 1.76 1. The second cancellation occurs when a contradictory sell Setup appears before the completion of the Countdown. completed Countdown “13s” coincide with a market’s top or bottom approximately four or five times a year. the number of Countdown 13s will increase commensurately.84 2 3 45 1 6 7 9 8 2 3 4 5 5 3 12 4 6 78 6 5 1.78 1. Sell Countdown inverts the rules for a buy Countdown: It begins once the minimum sell Setup requirement of nine consecutive closes greater than the close four bars earlier is fulfilled for a sell setup.74 10 17 24 May 2004 1 8 15 June 2004 22 1 8 15 July 2004 22 2 9 16 August 2004 23 1 8 15 22 September 2004 1 8 15 October 2004 Source: Bloomberg. The first occurs if. On shorter timeframe charts.FIGURE 1 — BRITISH POUND After the sell Setup series (green numbers) that completed in late May 2004. the buy Setup is cancelled and you must begin to look for a new Setup series. the pound’s upward momentum was interrupted for two weeks. Trading forex with TD Sequential The following daily charts illustrate continued on p.
Each asterisk day would have been a “13. four of the five Setup series have arrows that coincide with January 2005 • CURRENCY TRADER . weekly and monthly time frames. 2004 Source: Bloomberg. which happened to be the Countdown “12” day. as price moved sideways and then declined. the application of TD Sequential to cash currency trading. downside pressure subsided and the market rallied. 2004 March 2004 April 2004 May 2004 June 2004 July 2004 August 2004 Sept. which served to reinforce the original 13’s.200 10 11 1. a short-term rally ensued. This sell Setup was not perfected until the high close (day 12 of the Countdown) because days 8 and 9 of the sell Setup were below Setup day 7. Notice another sell Setup developed simultaneously with this Countdown (the second series of green numbers. below the red Countdown 32 mid September. the red arrow above the “9” indicates the sell Setup was “perfected. The Countdown process then began. 31) of the cash British pound (GBP/USD) shows a sell Setup series (green numbers) that completed in late May 2004. and the high of Setup day 7 was not exceeded until two days after the sell Setup day 9. 2004 Oct. price tested the 13 price level in each case and then made secondary Setup 9 series.S. which at that point interpreted the trend as bearish on the daily. Inc. price tested the 13 price level in each instance and then recorded secondary Setup 9 series. another perfected Setup 9 appeared that stalled the uptrend for a few days.240 1.280 6 5 4 123 1. after which the market entered the Countdown process. The peak of the rally was marked by a Countdown “13” and exhausted the upside for this market. Both Setup 9 series were perfected.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.220 1. Although both Countdown 13s marked trend reversals. 2004 Feb.CURRENCY STRATEGIES continued FIGURE 2 — EURO Although both the sell Countdown in early January and the buy Countdown in mid May marked trend reversals. followed by a buy Countdown. Once a valid Countdown 13 bar occurred. with the qualifying bars labeled numbers). In Figure 3 of the Australian dollar/New Zealand dollar cross rate (AUD/NZD). and the highest close of the rally. Also. daily 23 9 8 7 6 5 4 3 1 2 1 2 5 36 4 1 789 1. dollar (EUR/USD) illustrates a sell Countdown in early January and a buy Countdown in mid-May. Figure 2 of the euro/U.” Notice the upside progress was interrupted for 11 trading days after this bar. Note the Countdown 12 bar appeared in Operating against the trend is often difficult because it contradicts human nature. the Setup 9/Countdown 13/Setup 9 series that completed at the late-July bottom was particularly interesting because it defied conventional technical wisdom. with red numbers. followed by five asterisks before the Countdown 13 bar occurred.” but that designation was deferred because the lows of these bars were not as low or lower than the close of Countdown bar 8. Euro (EUR). however. In late July a buy Setup was perfected on day 8. 2004 Jan.260 9 78 1 1 2 3 4 5 6 7 8 9 12 13 3 2 45 6 789 1. In October. Figure 1 (see p.300 12 13 11 9 10 68 97 85 67 4 1 5 23 3 13124 12 9 11 10 889 7 7 66 5 5 44 3 3 2 1 12 1.
TD Countdown and TD Price Flip are registered trademarks. described by Tom DeMark in his book New Market Timing Techniques. When following trends. 1 8 15 22 June 2004 1 8 15 22 July 2004 2 9 16 23 August 2004 1 8 15 22 September 2004 1 8 15 22 October 2004 1 8 15 22 November 2004 1 either a short-term price reversal or price consolidation. For information on the author see p.0600 15 22 3 10 17 24 April 2004 May 2004 Source: Bloomberg. July 2004. “DeMark variation” Active Trader. and TD Sequential is an indicator designed specifically to accomplish this goal. CURRENCY TRADER • January 2005 33 . TD Sequential.120 1. Australian dollar/New Zealand dollar (AUD/NZD). This article illustrates how to use Tom DeMark’s TD Sequential and TD Combo indicators to identify trend-exhaustion zones. July 2002. September 2001 This is a Trading System Lab based on a simple pattern.activetradermag. Inc. “Demarking trend exhaustion zones” Active Trader.htm and download them to your computer. “Absolute price projections” Active Trader. entry competition produces slippage and price gaps that cut into performance.080 1. TD Setup. Tom DeMark applies objective price projection tools to historical price examples results to generate a stock market a forecast. these examples show there are distinct advantages to doing so.180 12 3 4 5 78 6 9 12 1 3 234 45 5 6 6 9 7 78 8 910 11 13 12 1. Forecasting trends instead of following them The advantage of using TD Sequential instead of conventional trend-following methods is that you can buy into weakness and sell into strength (and do so in size).com/purchase_articles.FIGURE 3 — AUSTRALIAN DOLLAR/NEW ZEALAND DOLLAR The two Countdown 13 bottoms were immediately followed by profitable upside price moves.140 78 6 9 45 3 12 34 1 2 34 5 6 78 9 1 23 45 6 78 9 10 11 12 13 3 12 5 1 9 5678 4 2 1 1. An extended interview with Tom DeMark. daily 1.100 1. You can purchase past articles online at www. The two Countdown 13 bottoms had immediate upside price responses that proved to be profitable moves.160 1. However. Related reading “Tom DeMark: Objectively speaking” Active Trader. named TD Carrie. 8. Operating against the trend is often difficult because it contradicts human nature. November 2001.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.