Thomas Demark








The innovative approach proposed by Tom DeMark has changed the cyclical analysis to a precise  and scientific technique based on some mechanical calculations. These allow us to identify in the cycles very significant price tops and  bottoms, which can become trend reversals in the market.
By those instruments the trader can choose a certain market position by minimizing the risk .

There are two Trading Systems:  the “SEQUENTIAL” and the “COMBO”.

They provide two indicators to enter into the market. The first entry signal comes during the first cycle creation ;   it is weak and it is considered a set up for the second stronger entry signal coming during the creation of the second cycle.
The first indicator is verified when the calculation produces 9 (sometime 8 ) consecutive bars. 
The second one is verified when the calculation produces 13 (sometime 12) NOT consecutive bars .

We have seen that the best time frame to consider is the “daily” (medium period) , which give a lesser margin of error .

Possible future set ups, that we can see during or after the count of  13(12) bars, can make stronger the first set up. For example, DeMark says that a very strong entry signal is verified when we have a setup formation of 9(8) bars after the count of 13, that is 9(8)+13(12)+9(8) bars.
In other words, to enter into the market after that configuration is not very risky .

If after the 13 bars what we are expecting does not happen,  it is highly probable that the cycle will continue to grow. Therefore we will need to wait for a new set up and a new counting of 13 bars.

In any case we must always check both, the counting of the “buy” indicators and of the “sell” indicators and evaluate at each time what it is the best thing to do. Because sometimes an entry signal coming from one side can be neutralized by an entry signal coming from the opposite side.

SOME RULES

CORRECT ACTIVATION OF A BUY SETUP PHASE
On the fifth day preceding the first day of setup, the daily closing bar needs to be higher than the daily closing bar of the day before the first day of Setup.
CORRECT ACTIVATION OF A SELL SETUP PHASE
On the fifth day preceding the first day of setup, the daily closing bar needs to be lower than the daily closing bar of the day before the first day of Setup.

CANCELLATION
Cancellation means that  the setup can be removed. As a consequence, the entry signal counting goes back to its zero setting.
This can happen when:
  1. REVERSE SETUP: it can occur when a contrary setup takes place after the setup and before the completion of its counting phase.
  2. LOWEST - HIGHEST SETUP: it can occur after the setup and before the completion of its counting phase. This means that a daily closing bar lower than the lowest closing bar of the setup occurs during  the successive phase of the counting for the SELL signal.
Or a daily closing bar higher than the highest closing bar of the setup occurs during  the successive phase of the counting for the BUY signal.

RECYCLE (optional)
The setup is replaced by a subsequent setup going in the same direction. This only involves the zero setting of the counting that might have started. The RECYCLE happens under the following conditions:
  1. A SETUP  in the same direction of the first one takes place.
  2. The high-low value of the second Setup (the difference between the highest maximum and the lowest minimum of the Setup) is greater then the true range of the first Setup.
  3. But “not too much,” says DeMark:  in the sense that the true range of the second Setup is smaller then the true range of the first Setup multiplied by a value between 1.618 and 3.

When one or both conditions b. and c. do not take place, the second Setup must be ignored, i.e. the first Setup and the subsequent counting for the entry signal both go on living.       

COUNTING FOR THE ENTRY SIGNAL
The 13th bar price needs to be higher than the 8th bar price
  1. According to DeMark, the closing bar value of the 13th or subsequent yellow bar needs to be higher than the bar closing value of the 8th yellow bar for the SELL signal; or lower for the BUY signal.
  2. Then DeMark states also that the value of the 13th or subsequent yellow bar needs to be higher than the closing value of 2 previous daily bars for the SELL signal; or lower for the BUY signal.

ENTRY SIGNAL
  1. It takes place directly on the 13th (or 12th) bar.
  2. We have an entry signal when, after the counting for the BUY Signal is finished, a counting yellow bar is made on the opposite direction, that is to say on the counting for the SELL Signal.  In the same way we have an entry signal when, after the counting for the SELL Signal is finished, a counting yellow bar is made on the opposite direction, that is to say on the counting for the BUY Signal.
  3. We have an entry signal when, after the counting for the BUY Signal is finished, a Setup bar is made on the opposite direction, that is to say in the Setup SELL.  In the same way we have an entry signal when, after the counting for the SELL Signal is finished, a Setup bar is made on the opposite direction, that is to say in the Setup BUY . 

Further complicated rules can be used to understand when it is the right time to enter into the market.  But  we use Sequential and Combo according to the analysis of the multi-cycles, which we consider  an effective tool.