How to Trade with the TD Sequential (Tom Demark)

What is the TD Sequential?

The TD (Tom Demark) Sequential is a powerful tool designed to identify the exact time of trend exhaustion and price reversal. It is a counter-trend tool that aims to solve the problem of several TA indicators that are profitable during trending markets but perform very poorly in ranging markets. TD Sequential can be used in any timeframe and in any market conditions. However, it is more reliable on H4 timeframes, and above.

Key Features

(1) The TD Sequential can be used in any timeframe and in any financial-traded asset

(2) It includes two phases: The setup phase (9-count) and the Countdown phase (13-count)

(3) The TD Sequential will work only in Japanese Candlesticks or a Bar chart

(4) Timewise, the TD Sequential is ideal for the early recognition of key market turning points

(5) The TD Sequential also generates support and resistance levels (TDST lines)

(6) The rules of TD Sequential can be easily modified, therefore, there are many variations

 

The Two (2) Phases of the TD Sequential

TD Sequential includes two phases that emerge after a Price-Flip:

(A) The TD Setup (Momentum Phase)

The TD Setup phase takes place after a Price Flip and includes a 9-candle count. If the 9-candle count is completed, the TD Sequential identifies a point of a likely top or bottom. (Trading Signal-1)

(B) The TD Countdown (Trend Exhaustion Phase)

The second phase is valid only if a TD Setup is already established. The TD Countdown includes a 13-candles count. If the 13-candles count is completed, the TD Sequential identifies a point of a likely top or bottom. (Trading Signal-2)

Visualizing and Explaining the Tom Demark Sequential

When the TD Sequential is applied to a chart, it adds various numbers on the top or bottom of each candle. These numbers follow a specific ascending order starting from 1 and aiming to complete a 9 count in the Setup Phase and a 13 count in the Countdown Phase.

TDST lines

TDST lines are support and resistance price levels that represent the extremes of the first bar in the Setup phase.

Chart: Applying the TD Sequential on EURUSD

As we can see in the above chart, the TD indicator generates TDST lines which represent support and resistance.

 

 

PHASE-1: EXPLAINING THE TD SETUP

This is a brief explanation of the TD Setup phase during a bullish and bearish market.

(A) Bullish Trend TD Setup

An initial starting number ‘1’ is plotted if a candle manages to close higher than the close of a candle four (4) periods ago. This four-period rule is key for the calculations of the TD Sequential as it repeats again and again. Consequently, the second number ‘2’ is plotted only if the second candle manages to close higher than the close of the candle four (4) periods ago. The point of reversal comes when the TD Sequential plots the number ‘9’ on top of a candle. In other words, when 9 consecutive candles managed to close higher than the candles of 4 periods earlier.

• If at any point, a candle closes lower than the candle four periods earlier the TD setup is immediately canceled
• For the perfect setup, the highs of the 8th and 9th candle must be higher than the highs of the 6th and 7th candle

(B) Bearish Trend TD Setup

In a bearish trend, the initial starting number ‘1’ is plotted if a candle closes lower than the close of a candle four (4) periods ago. And this rule is applied for all the following candles. The point of reversal comes when the TD Sequential plots the number ‘9’ on the bottom of a candle. In other words, when 9 consecutive candles closed lower than the candles of 4 periods earlier.

• If at any point, a candle closes higher than the candle four periods earlier the TD setup is immediately canceled
• For the perfect setup, the lows of the 8th and 9th candle must be lower than the lows of the 6th and 7th candle

Trading Signals in the Setup Phase

If one of the above patterns is completed there is a high probability that the market will reverse in the opposite direction. The number ‘9’ is ideal for entering a trade opposite to the established trend. The stop-loss should be above or below the highs/lows of the 9th candle. If the pattern plays out, the pullback will be significantly strong during the first 3-4 candles after the confirmation of number ‘9’.

When the 9th candle is confirmed, given that none of the Setup candles crossed its line of TDST Support/Resistance, there is a high probability for a trend reversal. Ideally, the 9th candle should close near its TDST line. If the Setup is perfect, anticipate 3-4 strong candles in the opposite direction.

 

PHASE-2: EXPLAINING THE TD COUNTDOWN

The second phase or else the TD Countdown commences after the TD Setup phase in already confirmed and completed. TD Countdown phase includes 13 candles. Each candle’s close is compared to a close of two candles earlier.

Why the Countdown phase is different than the Setup phase?

• There is a 13-count instead of the 9-count of the Setup Phase
• Each candle’s close is compared to the close of 2 candles earlier instead of the 4-candles of the Setup Phase
• The Countdown Phase doesn’t require a sequence of consecutive candles. If the order of candles is interrupted, the Countdown is not canceled, when the order of candles is restored, the countdown resumes
• The Countdown phase generates stronger trading signals than the Setup phase, which last longer too

Calculations

The TD Countdown phase starts as the TD Setup phase is already completed. The final ‘9’ candles of the setup become the candles number ‘1’ of the countdown. The number ‘1’ candle may be postponed until the conditions are met. The number ‘1’ candle may be postponed, but not canceled. In order for the TD Countdown phase to complete, the number ‘13’ candle must close above (on a bullish countdown) or below (on a bearish countdown) the close of Countdown candle number ‘8’.

Again, the 13th candle must be below/above the 8th candle. In addition, like every other Countdown candle, it must be higher/lower than the close of the candle two candles earlier. If both these conditions are not satisfied, we should expect new candles, until these requirements are met. If the 13th candle doesn’t meet the above conditions, it is plotted with a «+» above, and the TD Countdown continues to search for a 13th candle at the next ones until the conditions are met. When the Countdown Phase completes, a new Price Flip and the establishment of a new trend is likely to happen.

Trading Signals in the Countdown Phase

When the 13th candle of the countdown phase is complete, there is the most aggressive reversal signal to trade. The price reversal after the 13th candle is expected to be strong and last for several candles.

 

Combining TD Sequential with other TA Tools

Other indications should align with the results of the TD Sequential. The TD Sequential is a very powerful tool to answer the question “When a price reversal is likely to happen” but it cannot tell “If a price reversal will certainly happen”. As mentioned earlier, the TD Sequential works only on a Japanese Candlesticks chart or a Bar chart. Therefore, it can be perfectly combined with price formations or candlestick patterns that occasionally appear or these two types of charts.

 

TD Sequential Conclusions

The TD Sequential is a very useful technical analysis tool as it aims to predict the exact time of a price reversal. However, as in the case of any other tool, the TD Sequential should not be used in isolation. The TD Sequential should be combined with candlestick analysis, price patterns, or a proven indicator.

The TD Sequential is more reliable on H4 and above timeframes. However, as there are multiple conditions for the setup phase to complete, we shouldn’t expect too many trading signals.

Trading signals are generated in two instances:

(a) when the 9th candle of the setup phase is confirmed, given that none of the Setup candles crossed its line of TDST Support/Resistance. Ideally, the 9th candle should close near its TDST line. If the Setup is perfect, anticipate 3-4 strong candles in the opposite direction

(b) when the 13th candle of the countdown phase is complete, this is the most aggressive reversal signal

 

References:

1. TD Sequential: Thomas R. DeMark, The New Science of Technical Analysis, New York: John Wiley & Sons, 1994, Chapter 7, Sequential
2. Charting: TradingView.com