The TD Sequential is a powerful technical analysis tool developed by renowned market technician Thomas R. DeMark. It helps traders identify potential reversal points in trending or consolidating markets by pinpointing moments of trend exhaustion. This guide breaks down its core components and practical applications in clear, accessible language.
Understanding the TD Sequential Indicator
The TD Sequential indicator is part of a broader system of market-timing tools created by Thomas DeMark. Its primary purpose is to signal potential exhaustion of a prevailing trend, offering insights into possible entry and exit points. The indicator is divided into two main parts: the TD Setup (which creates the structure) and the TD Countdown (which provides the sequential count). Both components work together to generate trading signals.
TD Setup: Building the Foundation
The TD Setup forms the initial phase of the indicator and is essential for identifying the basic structure that may lead to a trend reversal.
TD Buy Setup
A TD Buy Setup forms during a downtrend. It requires nine consecutive candles where each candle's close is lower than the close of the candle four periods earlier. The highest price of the first candle in this setup establishes what is known as the TD Buy Setup Trend Resistance Line.
TD Sell Setup
Conversely, a TD Sell Setup appears in an uptrend. It consists of nine consecutive candles where each candle's close is higher than the close of the candle four periods prior. The lowest price of the first candle in this sequence forms the TD Sell Setup Trend Support Line.
TD Countdown: The Sequential Phase
After a TD Setup is complete, the TD Countdown phase begins. This involves a more refined count that starts from the ninth candle of the setup and continues under specific conditions.
Initiating the Count
For a TD Buy Setup, the countdown begins from the ninth candle. Each subsequent candle is counted if its close remains lower than the close two periods earlier. The count can proceed up to a maximum of 13, though it may be interrupted if the conditions are not met.
The count does not need to be continuous. If a candle fails to meet the criteria, the count pauses and may resume later, or a new setup may begin.
Count Interruption
A count is interrupted if a candle does not satisfy the sequential condition. For example, in a buy countdown, if a candle closes higher than the close two periods prior, the count halts. A new count may only begin after another valid TD Setup forms.
Practical Application and Trading Signals
The true value of the TD Sequential lies in its ability to generate potential buy and sell signals upon completion of a setup or countdown.
TD Buy Signals
A completed TD Buy Setup (sequence of 9) suggests a potential bullish reversal, indicating a buying opportunity. A stronger signal is given upon the completion of a full 13-count buy sequence.
Example 1: Setup Buy Signal
After a 9-sequence TD Buy Setup is confirmed, if the low of the eighth or ninth candle is lower than the lows of the sixth and seventh candles, it can be considered a valid buy signal. A stop-loss is often placed below the lowest price within the TD Setup structure.
Example 2: Countdown Buy Signal
A completed 13-count buy sequence offers a higher-probability buy signal. Traders might enter a long position after the thirteenth candle closes, setting a stop-loss below the lowest point of the entire countdown phase.
TD Sell Signals
A completed TD Sell Setup (sequence of 9) implies a potential bearish reversal, signaling a chance to sell or short. A more reliable signal occurs after a full 13-count sell sequence.
Example 3: Setup Sell Signal
When a 9-sequence TD Sell Setup forms, and the high of the eighth or ninth candle exceeds the highs of the sixth and seventh candles, it reinforces a sell signal. A stop-loss can be placed above the highest price within the TD Setup.
Example 4: Countdown Sell Signal
The completion of a 13-count sell sequence provides a strong sell signal. Entering a short position after the thirteenth candle, with a stop-loss above the highest point of the countdown, is a common strategy.
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Frequently Asked Questions
What is the main purpose of the TD Sequential indicator?
The TD Sequential is designed to identify potential trend exhaustion and reversal points in financial markets. It helps traders time their entries and exits by providing structured buy and sell signals based on consecutive price closes.
How reliable is the TD Sequential for trading?
While it is a widely respected tool, no indicator is foolproof. Signals from a 13-count sequence are generally considered more reliable than those from a 9-sequence setup. It is best used in conjunction with other analysis techniques and proper risk management.
Can the TD Sequential be used on all timeframes?
Yes, the TD Sequential can be applied to various timeframes, from intraday charts to weekly or monthly views. However, signals on longer timeframes tend to carry more weight due to the larger amount of data they encompass.
What happens if a count is interrupted?
If a candle fails to meet the counting criteria, the sequential count is paused or invalidated. A new TD Setup must form before another countdown can begin. This mechanism helps avoid false signals during volatile or non-trending market conditions.
Is the TD Sequential suitable for beginners?
The concept is straightforward, but applying it effectively requires practice. Beginners should first learn to identify setups and countdowns on historical charts and use demo accounts to practice before applying it with real capital.
How should I manage risk when using this indicator?
Always use stop-loss orders based on the high or low of the TD structure. The indicator provides potential reversal points, but markets can always continue trending. Proper position sizing and risk management are essential.