Investors have become seriously gun-shy. Even top traders such as Warren Buffet have found themselves in money-losing trades. For some, it may feel as if their edge has evaporated.
However, the approach developed by Tom DeMark, an analyst who has worked with such luminaries as George Soros, Paul Tudor Jones and Steve Cohen, may be of help in today’s markets.
In the 1970s, before the days of personal computers, DeMark spent his waking hours working out by hand a maze of market indicators that he laboriously tested through trial and error. (He was so obsessive that in his spare time, he charted his infant daughter’s heart rate.) DeMark’s resulting discoveries became widely known to and adopted by market pros. The method combines elements of both trend following and countertrend trading.
Two of the great aspects of the DeMark system are that the main rules are public and they are simple to apply.
THE BASICS
In DeMark’s system, rather than using previous highs and lows to locate support and resistance, he turns the idea upside down. He found a way to spot when those trends actually start. Think of these spots as launching pads for new trends. He then discovered rules to show when those trends are about to exhaust and reverse. This is important because it can give traders an idea of when to initiate positions or when to get out of them.
Several complex books have been written about DeMark’s indicators. But the core of his system is fairly simple to learn and use. Once you start, you might never look at a chart the same way again.
The heart of DeMark’s system is called TD sequential. This is the countertrend part. It has two stages: the TD setup—a specific sequence of trending price bars—and the TD countdown (more on that later).
A TD buy setup occurs when a market records nine consecutive price closes less than the close of four price bars earlier. A TD sell setup is the opposite. Either type of setup is canceled if it is interrupted before the sequence is completed.
These setups occur in charts of all timeframes. Therefore, any trader, from day traders to position traders, can use the system.
A completed TD setup represents a strong move in the market that, in some cases, may have exhausted itself. Some more aggressive or shorter-term traders enter positions as soon as a setup has been completed. After a buy setup is finished, representing a strong downtrend, a trader would go long, expecting that the market would now reverse course. In the case of a completed sell setup, a trader would go short.
Once a setup has been completed, DeMark found that markets typically experience what he calls a hiccup—a short-term reversal or consolidation period lasting for a few price bars. The hiccup can start the day after the setup is...