Tuesday, November 6, 2012

Tom DeMark Trend Line

Technicians use trendlines to identify trends and determine when they end or reverse. The only problem with traditional trendlines is they are subjective — 10 traders could look at a chart and draw 10 different trendlines. Proper trendline application and analysis require consistent, objective rules. The TD-Line technique was developed by Tom DeMark and is detailed in his books The New Science of Technical Analysis (John Wiley & Sons, 1994) and DeMark on Day Trading Options (McGraw-Hill, 1999). The complete methodology includes objective rules for plotting these trendlines, rules for validating them, and rules to determine whether to trade or fade a trendline break

To accomplish this, TD Lines require a trendline to connect “TD Points” (which are more commonly called “pivot” highs or lows, or “swing” highs or lows). A TD Point high is a high preceded and followed by an equal number of lower highs. A TD Point low is the opposite — a low surrounded by an equal number of higher lows. For example, a “Level One” TD Point low has one higher low before and after it; a Level Two TD Point low has two higher lows before it and two higher lows after it, and so on.

TD Lines of different degrees of significance are constructed by connecting TD Point highs or lows of the same degree — i.e., connecting Level Two TD Point lows or connecting Level Three TD Point highs.

For example, to plot a Level One TD Demand Line (Figure 1), which is used to identify support, start from the rightside of the chart and connect the two most recent Level One TD Price Point lows. (Starting from the right side of the chart insures that the most recent price history is being used to identify the trend.) If the TD Demand Line is sloping upward, the current trend is up. A horizontal TD Demand Line reflects a sideways market.
(Figure 1)

A TD Supply Line is plotted using the same procedures. Start from the right side of the chart and look for the two most recent Level One TD Price Point highs. Draw the supply line along these two highs.

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