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DeMark Indicators
Jason Perl
The essential De Mark Indicators—what they are, how they work, and how to use them
Format: Hardcover
ISBN: 9781576603147
Publisher: Bloomberg Press
Series: Bloomberg Market Essentials: Technical Analysis
Pub. Date: 9/2008
208 pages, 6" x 9"
Retail Price: $29.95
Your Price: $25.46
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Jason Perl is global head of Fixed Income, Currencies & Commodities Technical Strategy at UBS Investment Bank. Perl’s area of technical expertise is the DeMark Indicators, which he has been using for the past fourteen years. In his current role, he and his team provide both short- and medium-term trading strategies to central banks, hedge funds, institutional investors, and wealth managers around the world; and general, specialist-education technical analysis training.
Prior to joining UBS, he was an independent consultant advising proprietary desks and hedge funds. He was a contributing editor for Futures & Options World, FX&MM, and the International Petroleum Exchange’s (IPE) Pipeline magazine.
Foreword by Thomas R. DeMark
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“Having observed his market calls real time over the years, I can say that Jason Perl’s application of the DeMark Indicators distinguishes his work from industry peers when it comes to market timing. This book demonstrates how traders can benefit from his insight, using the studies to identify the exhaustion of established trends or the onset of new ones. Whether you’re fundamentally or technically inclined, Perl’s DeMark Indicators is an invaluable trading resource.”
—Leon G. Cooperman
Chairman, Omega Advisors
“Tom DeMark, the man whose work inspired this book, is a unique, interesting, and ofttimes iconoclastic technical analyst. Simply put, he thinks about the markets differently from the way you or I do. So why should you read this book? Because, having read it, you will almost certainly think about the markets and technical analysis differently.”
—John Bollinger, CFA, CMT
www.BollingerBands.com
“Jason Perl is the trader's technician. DeMark Indicators are a difficult subject matter, but Jason shows simply how the theory can be applied practically to markets. Whether you're day-trading or taking medium-term positions, using the applications can only be of increased value.”
—David Kyte, Founder
Kyte Group Limited
“Jason Perl has taken the playbook from the market’s John Wooden, Tom DeMark, and translated it engagingly in a format that traders of all levels will appreciate. As one who has used these indicators for more than twenty years, I too am appreciative of Jason’s clarity.”
—Peter Borish
Chairman and CEO, Computer Trading Corporation
“Jason Perl has created a trading primer that will help both the professional and the layman interpret the DeMark Indicators, which I believe represent the most robust and powerful methods to track securities and establish timely investment positions. Think of DeMark Indicators as the Rosetta stone of market-timing technology.”
—John Burbank
Founder and CIO, Passport Capital
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Foreword by Tom DeMark
Acknowledgments
Introduction
Author’s Note About DeMark Indicator Trademarks
1 TD Sequential: Defining the Trend and Identifying Exhaustion Points
2 TD Combo
3 TD D-Wave
4 TD Lines
5 TD Retracements
6 TD Trend Factor and TD Propulsion
7 TD Oscillators
8 TD Moving Averages
9 TD Range Projection, TD Range Expansion Breakout and TD Channels
10 Short-Term Indicators: TD Differential, TD Reverse Differential, and TD Anti-Differential
11 TD Waldo Patterns
12 Putting It All Together
13 Learning the DeMark Indicators
Index
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Chapter 1
TD Sequential: Defining the Trend and Identifying Exhaustion Points
When I started looking at the DeMark indicators in the early 1990s, it was TD Sequential that first piqued my interest. I had previously come across other technical studies that identified trading opportunities well when prices were trending, and still other indicators that were particularly suited to ranges, but I had found it frustrating that none of these approaches was sufficiently dynamic to distinguish between these two very different types of price action.
TD Sequential appeals to me because it addresses that problem, having both momentum (TD Setup) and trending (TD Countdown) components. Furthermore, it’s completely objective and incorporates disciplined money-management rules, and (because it’s based on relative price action) you can apply it to any market or time frame, regardless of the market’s underlying volatility, without having to change any of the default indicator settings.
For those of us brought up in the computer age, it may seem hard to believe, but Tom DeMark developed TD Sequential by hand, through a process of trial and error, in the 1970s. It never ceases to amaze me how something originally created to analyze daily price data can be applied so effectively, more than thirty years later, to any time frame—from one minute to one year—and to any market.
Since the majority of people are trend followers, it’s hardly surprising that “the trend is your friend” is one of the most widely quoted trading mantras. While it may seem counterintuitive, given that most people do follow trends, TD Sequential attempts to isolate prospective exhaustion points in ranges, to anticipate market tops and bottoms when it believes prices are overbought or oversold, during trends when sentiment is invariably at an extreme. Even if you are not inclined to the technical, TD Sequential can be helpful for market-timing purposes, as an adjunct to your existing arsenal of trading tools. Traders oriented to fundamentals tell me it helps them determine take-profit levels when they would otherwise be reliant on a less-efficient price-reversal pattern to close out a profitable position. TD Sequential also highlights, at the time the signal is generated, points where one should refrain from establishing or adding to an existing position in the direction of the underlying trend. Once you’re comfortable with the methodology, however, you can use TD Sequential as I do, to fade trends.
Let’s look at the components of TD Sequential in order to understand how and why it manages to be so versatile. The indicator has two components: TD Setup, which relies on momentum to define price ranges, and TD Countdown, which is trend based, and looks for low-risk opportunities to fade established directional moves. As TD Sequential is probably the most-talked-about TD indicator, I’ll explain it in detail for both bullish and bearish scenarios, as well as answer some frequently asked questions.
TD Setup
TD Setup is one component of TD Sequential; the other component, TD Countdown, cannot come into play until a TD Setup formation is complete. TD Setup, however, is not only a prerequisite for the broader trend- reversal TD Countdown signal; it is also an indicator, one that can help determine whether a market is likely to be confined to a trading range or to be beginning a directional trend. TD Setup, of course, has both buy and sell indicators, and I will address them separately. The prerequisite for a TD Buy Setup is a Bearish TD Price Flip, which indicates a switch from positive to negative momentum (Figure 1.1 in the book).
--Bearish TD Price Flip A Bearish TD Price Flip occurs when the market records a close greater than the close four bars earlier, immediately followed by a close less than the close four bars earlier.
--TD Buy Setup After a bearish TD Price Flip, there must be nine consecutive closes, each one less than the corresponding close four bars earlier. Since the indicator was originally designed to look at daily price data, a comparison of the closing price with the closing price four bars earlier represents a rolling week.
--Interruption of a TD Buy Setup If, at any point, the sequence—of nine consecutive closing prices less than the closing price four bars earlier (up to and including the close of TD Buy Setup bar nine)—is interrupted, the developing TD Buy Setup will be canceled and must begin anew.
Having to start all over again can test one’s patience, because it postpones the appearance of a signal. But the delay is meaningful, because it suggests a change in market dynamics, which the indicator acknowledges by changing its behavior.
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