via “IMPRESSIVE SIGNALS FROM DEMARK”
THE TECHNICAL ANALYST
September/October 2004

“I recall that a recent backtest of the Sequential signals showed them to be around 70% accurate. DeMark is essentially a risk-reward strategy and its stoploss positioning means that even when the indicators   occasionally underperform, losses are cut to a minimum. In my experience, the TD Sequential Indicator is more than 70% reliable; it is closer to 90%.”  – Kurt Magnus, head of foreign exchange sales at Westpac bank in London

The DeMark Sequential Indicator

Magnus uses Bloomberg charts whose software automatically recognizes and displays TD Sequential Indicators as prices change from day to day. The Sequential is perhaps the most commonly used DeMark indicator and has an impressive record of identifying and anticipating turning points across the FX, bond, equity and commodity markets. Furthermore, the indicators provide signals not only on a daily, weekly
and monthly basis but also intraday. The Sequential Indicator identifies when a trend is becoming, or has become, exhausted. On daily charts, for example, DeMark identifies precisely which day to enter into a new position or liquidate an existing one. This total absence of ambiguity with regard to market timing makes the Sequential stand out. Using the indicator does require a leap of faith however, as signals often appear  prematurely. As such, a buy signal may appear before a downtrend has completed so the trader may have a nervous ride before the market finally turns. Magnus warns that it is crucial the indicator is properly understood. “Unless you understand exactly the maths behind the signals, you can make costly errors. There are only two guys in the London FX market who can explain these signals with authority. Jason Perl at UBS in London and I often talk to make sure we get it spot on.”

Setups

The TD Sequential Indicator consists of two patterns, a TD Setup and a TD Countdown. Setups are the shortest in duration, lasting for exactly nine price bars when completed. For example, a buy Setup exists when there have been nine consecutive price bars in which each bar’s close is lower than the close four price bars earlier. When a price bar closes below that of four price bars previously a ‘1’ appears below the bar.  If the next price bar also closes below that of four bars earlier a ‘2’ appears and so on. These appear in Figure 2 in green, a chart of EUR/USD from February to May ’04. If before price bar 9 is reached a price bar fails to  close below that of four bars previously then the Setup is abandoned and the numbers are automatically deleted. Once nine consecutive price bars have been completed the trader will be looking for a “perfected”  Setup; one that is now valid for trading. A buy Setup is perfected when the low of either price bar 8 or 9 is less than the lows of both price bars 6 and 7. Perfected sell Setups look for a high of either price bar 8 or 9 that is greater than the highs of both price bars 6 and 7. Figure 2 clearly shows perfected sell Setups in February and April marked with a red arrow.

Countdowns

A TD Countdown occurs after a completed Setup. A buy Countdown consists of thirteen price bars whose close is lower than or equal to the low two bars earlier. The corresponding numbers appear below the price  bar. Unlike the Setup, a Countdown doesn’t have to consist of consecutive days. The Countdown is a bigger pattern than the Setup in that it can take months for a Countdown to form and often signifies a larger  market move once the trend changes. Like the Setup, the Countdown also has “perfection” criteria. For a buy Countdown this requires that the low of price bar 13 be less than or equal to the close of price bar 8.  Similarly, sell perfections require that the high of price bar 13 be greater than or equal to the close of price bar 8.

Note: Mistake under ‘TD Countdown – Sell Signal’: should read: “13 price bars where each close is greater than or equal to the HIGH 2 price bars earlier”