No trader can talk about technical analysis without talking about the Tom demark indicators.
There are many analysts and traders who have made a significant contribution in technical analysis.
Tom Demark is one of the brightest minds in this field.
Without him, technical analysis wouldn’t have been the way it is today.
He is the creator of Demark indicators, and he has offered consultancy services to big names in the trading industry.
Demark made an outstanding contribution in technical analysis by building various trading indicators.
In this article, I will be discussing the Tom demark indicators in detail.
I will help you know how to incorporate these trading indicators in your trading strategy.
Tom Demark Indicators
Demark indicators help traders analyze market trends.
With the Demark trading strategy, a trader can evaluate the current state of a trend and determine its likely exhaustion point.
Demark analysis has been found to be a powerful tool for determining the terminal point of trends.
It gives an accurate end of trend point, hence, it can help traders get aboard as a new trend begins.
Due to that, Forex traders can incorporate Demark studies in both a trend-following manner and contrarian approach.
However Tom Demark indicators (TD indicators) are not well-known among Forex traders.
You will be shocked to realize that there is a large percentage of Forex traders who have never heard about Demark studies.
One of the reasons behind this is that there is not much information online about TD indicators compared to other trading indicators like RSI, MACD, Stochastic, etc.
Technical Analysis Using Tom Demark Indicators
Forex traders use TD indicators to perform in-depth trend analysis.
Tom demark indicators can give different signals depending on the health of the current trend.
The type of TD indicator that you use determines the complexity of Demark analysis.
In this article, I will be focusing on three indicators that I believe that they offer the most value to traders.
These include the DeMarker, TD Trendline (also called Demark Trendlines) and TD Sequential (also called Demark Sequential).
Let’s begin with the first one…
The DeMarker Indicator
This is the first TD indicator that we will discuss.
It is one of the most powerful Tom demark indicators, and it’s available on any trading platform.
It’s a free TD indicator.
The DeMarker indicator is an oscillator, and it only travels within the positive territory.
This is similar to how the RSI indicator behaves.
However, the resemblance between the two doesn’t stop there.
The DeMarker indicator also has overbought and oversold levels.
Consider the chart given below:
See the DeMarker indicator at the bottom of the chart.
It looks like the RSI indicator.
So, the indicator should be interpreted as follows:
-Values above 70 show the overbought territory. Traders go short.
-Below 30, the bulls enter the market, and as the market enters the oversold position, traders go long.
Consider the following chart…
The above chart shows how to identify the overbought and oversold positions when using the DeMarker indicator.
See that there are three dotted lines running horizontally at the indicator section.
The dotted line at the top is at the value of 70.
The dotted line at the middle is at the value of 50.
The dotted line at the bottom is at the value 30.
The DeMarker doesn’t move far from the top and the bottom dotted lines.
At any particular point, it tries to move sideways in between these two lines.
This has been shown by the red arrows pushing the DeMarker downwards and the blue arrows pushing the DeMarker upwards.
In a way, you can see these two lines as acting like Resistance and Support levels respectively.
You must be thinking that you’ve found a perfect indicator.
The overbought and oversold positions only work when a currency pair consolidates or is ranging.
Here is an example of a ranging market…
The above chart shows a market in a range.
The range has been shown as a rectangle drawn in black and marked as Range.
However, it does not mean that there is no use for the overbought and oversold levels with the DeMarker in a trending market.
They are useful when a trader uses them as part of an integrated multi-frame analysis.
For example, the above chart shows a triangle as a continuation pattern.
This is shown below…
The two red lines shows the formation of a triangle as a continuation pattern.
In such a case, you can ignore the overbought levels and buy on the oversold levels only.
Tom Demark Trendlines
The Tom Demark trendlines is a straightforward indicator but very powerful once you understand how to use it.
Consider the chart given below…
The above chart shows the two lines that make up the TD trend line indicator.
The upper line has been drawn in red and is bearish.
It connects the two most recent tops of the price action.
The lower line has been drawn in blue and shows a bullish trend.
The line connects the two most recent bottoms of the chart.
The price action has been squeezed between these two converging lines.
Based on the TD trend line indicator that you use, it can build then automatically draw the two lines for you dynamically.
In this article, I will be drawing the TD lines myself.
You can also do it otherwise depending on the trading platform that you’re using as well as your preference.
Also, there are TD trend line indicators that plot additional lines below and above the current price action.
You can use these as targets for potential trades.
This will come later, for now, let’s focus on the actual TD line signal.
Demark Trendline Trade Signals
The Demark trend line indicator gives traders a straight-forward signal.
But, what are we specifically looking for?
We want to see the price action break out through one of the plotted lines.
If the price action breaks out through the upper line in a bullish direction, you should take it as a buy signal.
This means that you should enter a long position immediately.
If the price action breaks through the lower line in a bearish direction, you should take it as a sell signal.This means that you should short the currency pair immediately
Demark Trendline Trading Strategy
In this section, I will be taking you through a basic Demark trendline trading strategy.
I will show you how to time your entry point, where to place your stop loss, and the where to set your profit target.
Timing your Entry Point
If the price action breaks the upper line in a bullish direction, open a long trade.
This means that you should buy the currency pair.
The reason is that there are high chances that the price action will maintain the bullish move for some time.
If the price action breaks the lower line in a bearish direction, it’s time for you to open a short trade in the currency pair.
The reason is that there are high chances that the price action will maintain the bearish move for some time.
Placing the Stop Loss Order
Now that you have entered into a trade, you should not trade blindly.
You have to protect it so that in case the price action reverses, your profits will remain safe.
A stop loss order is the tool that can help you protect your profits.
But, the question is…
Where should you place your stop loss order?
Let me show you…
If you are in a long position, place your stop loss order just below the lower trend line.
If you are in a short position, you can place your stop loss order just above the upper trend line.
However, with the above approach, you may realize that your stop loss is at a level that is too far for your comfort.
In such a case, you can use an intervening swing to place your stop loss.
If you use a more sophisticated Demark trendline indicator, you will get levels on the chart that are marked and suggested as potential target.
However, you may not have this feature, or you may choose to manage the exit on your own.
In that case, you can watch for the next level support or resistance levels after the occurrence of a breakout for potential exit points.
Having discussed all the above, I want to show you how to put them into practice.
Consider the chart given below…
The above chart shows how to trade using the Demark Trendline trading strategy.
The Demark trendlines have been shown using red and blue lines.
The upper trend line has been shown in red while the lower trend line has been shown in blue.
The buy signal occurs when the price action breaks through the upper trend line in a bullish direction.
This position has been shown by a green arrow marked as Buy.
It is after the occurrence of this breakout that you should look to open a long trade.
However, this trade should be protected using a stop loss order.
The reason is that the price action may reverse into a bearish direction.
In case of such an occurrence, a stop loss will protect your trading account from being wiped out.
So, the stop loss has been placed just below the lower Demark line.
It has been shown using a red horizontal line marked as Stop Loss.
See the magenta line running horizontally at the top of the chart.
This line has been drawn such that it touches the most significant top on the chart.
This line has been used as the target.
Also, see that the two Demark trend lines, the red and the blue lines, are compressing the price action.
Because of this compression, we should see a volatility expansion out of this consolidation.
What follows this consolidation is a breakout in the bullish direction.
This bullish breakout managed to hit the target level.
Since the price action has hit the target level, this is a good position for you to exit your long position.
This position has been shown clearly on the chart using a red arrow marked as Close.
However, in this case, the price action maintained the bullish move for some time even after hitting the target.
If you could have stayed in the trade for longer, you could have earned more profit.
However, you cannot just do it blindly.
A trailing stop loss can help you stay protected.
This type of stop loss shifts its position if the price action moves in your favor.
After each moves, it locks in the profits that you have made, making sure that they are not wiped out in case the price action reverses.
So, that’s how to trade the Demark Trendline.
Next, we will be discussing the Demark Sequential.
Tom Demark Sequential
This is the third Tom demark indicator that we will discuss.
It is a bit complicated compared to the previous indicators, hence, more practice is required before you can apply it successfully in live market conditions.
This indicator works by adding various numbers on your chart.
The numbers are located both below and above the Japanese candlesticks on the chart.
Consider the chart given below…
The above chart shows the TD Sequential indicator.
Various numbers have been added to the tops and the bottoms of the Japanese candlesticks.
If you take a closer look at the numbers, you will realize that they are not random.
Instead, the numbers occur in an ascending order, starting from number 1.
The numbers may confuse you, but you will soon learn how to use them.
In the next section, I will be helping you know how this sequence of numbers is built.
So, keep reading!
How to Calculate TD Sequential
As you might have noticed from the previous chart, the TD Sequential indicator shows a sequence that is related to the health of the current price trend.
I want to show you how the TD sequence is built.
So, let’s start…
The initial starting point is marked with a 1.
To be more specific, if the trend is bullish, “1” is plotted once the price action closes a candle higher compared to the close of the candle four periods ago.
Then on the next bar, a “2” is plotted if the price action closes a candle higher compared to the close of the candle four periods ago.
This rule is applied for each succeeding bar.
For a bearish move, a “1” is plotted when the price action closes a candle lower compared to the close of the candle four periods ago.
On the next bar, a “2” is marked if the price action closes a candle lower compared to the close of the candle four periods ago.
This rule should be applied for the succeeding candles.
That’s how the TD Sequential numbers are calculated!
But, what signals do they send?
That’s what we will be discussing in the next section.
TD Sequential Indicator Signals
The TD sequential strategy generates two basic signals.
These signals forecast a price exhaustion and high chances for a potential correction.
These are just the bearish and the bullish signals.
Let’s discuss them…
TD Sequential Bearish Signal
Suppose you have a bullish trend.
The price shows an increase and the TD sequential numbers 1, 2, 3, 4, 5, 6, 7…
You then get a bearish signal at a time when the Demark Sequential indicator gives you the number “9”.
So, it means that the price action closed 9 consecutive candles whereby each candle closed higher than the candle 4 periods earlier.
The signal will be even stronger if the highs of the candles 8 and 9 are higher than the highs of the candles 6 and 7.
Consider the chart given below…
The above chart shows the formation of a bullish trend where the TD sequential indicator shows the numbers 1, 2, 3, 4, 5, 6, 7, 9.
After confirming such a trend, just know that it could be signaling a potential pullback in the bearish direction.
You will see the strength of the pullback during the first four candles once the candles marked “9” is confirmed.
TD Sequential Bullish Signal
In this case, you are analyzing a bearish trend.
The numbered candles will also be bearish.
For a bullish signal, we should have 9 bearish candles, with each candle closing lower than the candle that is located four periods earlier.
You will get the bullish signal once the Demark Sequential indicator gives you the number “9”.
The bullish signal will even be stronger if the lows of the candles marked 8 and 9 are lower compared to the lows of the candles marked 6 and 9.
Demark Sequential Trading Strategy
Tom Demark gives so many detailed rules about how to trade using the TD Sequential indicator in his book titled “The New science of Technical Analysis.”
In this article, I will give you the core principles surrounding this indicator and create a trading strategy around that.
So, we will be deriving trading concepts based on what we have discussed about the Demark sequential indicator.
We will discuss how to time your entry point, and where to place your stop loss and the profit target.
We will be using a bearish TD sequential indicator.
Timing the Entry Point
First, you must have a bullish trend in place.
You should get nine consecutive periods with each candle closing higher than the period four candles earlier.
Once you see the number “9” on the chart, it is time for you to short the market at the end of that period.
The reason is that there are high chances that the bullish trend will be reversing immediately into a bearish trend.
Staying in the long trade can be dangerous as your profits may be wiped out.
How to Place the Stop Loss Order
The stop loss order will protect you from incurring a loss in case of a trend reversal.
The ideal place to place your stop is above the last high of the current bullish trend.
However, it will be good to ensure that you place it at a relative distance.
This is to ensure that it is not triggered by the volatility that occurs during the reversal of a trend.
This may trigger the stop, hence, you may exit the trade when it’s too early.
Consider the chart given below…
The above chart clearly shows the position where you should place your stop loss in relation to the “9” signal in a bullish trend.
Once you spot the “9” signal, it is time for you to short the market.
This has been shown using the green arrow marked as Sell.
To stay protected, you should place a stop los order just above the “9” signal.
This has been shown using a red line marked as Stop Loss.
Note that the stop loss should be placed at a relative distance from your entry point.
The reason is that there is normally some kind of volatility that occurs at the turning point of the price.
If you place it too tight, it will be triggered too early, leading to a pre-mature top.
Setting the Profit Target
I want to show you how to trade the TD Sequential indicator.
Consider the following chart…
The above chart begins with a bullish trend.
Our aim is to monitor the bullish trend for a TD Sequential signal.
See the long red arrow running diagonally.
It shows the formation of a bullish trend.
This trend is marked by the 1-9 TD sequence.
When the number “9” is printed on the chart, it is time for you to sell the Forex pair.
This point has been shown by the green arrow marked as Sell.
The printing of the number “9” on the chart acts as a signal that there is a potential reversal of the price action in a bearish direction.
Due to this, it is the right time for you to sell the currency pair.
If the price reversal finds you in a long position, you will make a loss.
After selling the currency pair, you need a stop loss order to protect your trade.
This has been placed at a relative position right from the point of entry.
After the bullish candle marked with “9”, the next candle is bearish.
This is followed by a slight decline in the price of the currency pair.
However, a new bullish move begins.
See that this bullish move doesn’t manage to reach the level at which we have placed our stop loss order.
If we had placed the stop loss too tight, it would have been triggered, hence, we could have exited the trade when it’s too early.
That is the importance of placing a stop loss order at a relative position from the entry point.
This up thrust is then followed by a further decline in the price of the currency pair.
The chart also shows the point at which you should close the trade.
This has been shown using a red arrow marked as Close.
The closing point is determined by the next four candles after the number “9” is printed.
This is the idea that we have used to determine the position at which to exit the trade.
That’s how to trade the three Tom demark indictors.
This is what you’ve learned in this article…