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Counting and Numbering Systems: An Overview A Comprehensive Guide to TheSTRAT: Trading Strategy for the Modern Trader
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TD Sequential: A Comprehensive Guide for Traders

Introduction

The TD Sequential is a powerful technical analysis tool designed to identify the exact time of trend exhaustion and potential price reversals. Tom DeMark introduced it in his book, “The New Science of Technical Analysis” (1994). As a counter-trend tool, the TD Sequential aims to solve the problem of several technical analysis indicators that perform well during trending markets but struggle in ranging markets. By understanding the key concepts and applications of the TD Sequential, traders can enhance their market timing and improve their trading strategies. This article will explain the TD Sequential in-depth, its calculations, interpretations, advantages, limitations, and role in a comprehensive trading approach.

TD Sequential

Calculation of the TD Sequential

The TD Sequential comprises two main phases: the TD Setup phase and the TD Countdown phase. These phases help identify potential trend reversals in bullish and bearish markets. Here is an overview of how the TD Sequential is calculated in both directions:

  1. TD Setup phase: The TD Setup phase consists of a 9-candle count. In a bullish trend, a starting number ‘1’ is plotted if a candle closes higher than the close of a candle four periods ago. In a bearish trend, a starting number ‘1’ is plotted if a candle closes lower than the close of a candle four periods ago. The following numbers are plotted when each successive candle satisfies the four-period rule. The potential reversal point comes when the TD Sequential plots the number ‘9’ on top of a candle in a bullish trend or at the bottom of a candle in a bearish trend. The TD Setup is immediately canceled if, at any point, a candle fails to satisfy the four-period rule.
  2. TD Countdown phase: The TD Countdown phase starts after completing the TD Setup phase and consists of a 13-candle count. In a bullish countdown, each candle’s close is compared to the close of two candles earlier, and the close must be greater than the close two periods earlier. In a bearish countdown, each candle’s close is compared to the close of two candles earlier, and the close must be lower than the close two periods earlier. The countdown does not require a consecutive sequence of candles; if the order of candles is interrupted, the countdown is not canceled. The TD Countdown phase generates stronger trading signals than the Setup phase, with the potential for longer-lasting price reversals.

By understanding the bullish and bearish trends calculations, traders can use the TD Sequential to better anticipate potential trend reversals and optimize their trading strategies.

Interpretation of the TD Sequential

The TD Sequential generates specific numerical values on the chart, following an ascending order from 1 to 9 in the Setup phase and from 1 to 13 in the Countdown phase. These numbers, plotted above or below the respective candles, provide potential signals for trend exhaustion and price reversal.

In the Setup phase, a completed 9-count indicates a potential reversal point. In the Countdown phase, a completed 13-count suggests a higher probability of trend reversal. Additionally, the TD Sequential generates TDST lines, which act as support and resistance levels based on the extremes of the first candle in the Setup phase.

Example scanners and strategies that use TD Sequential

The TD Sequential can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"TD Sequential Bullish" scanner by ILuvMarkets
charts.trendspider.com
“TD Sequential Bullish” scanner by ILuvMarkets
"TD Sequential Bullish" strategy by ILuvMarkets
charts.trendspider.com
“TD Sequential Bullish” strategy by ILuvMarkets

How to Use the TD Sequential in Trading

  1. Identify the Setup phase: Look for a completed 9-count in a bullish or bearish trend. This may signal a potential reversal point.
  2. Observe the Countdown phase: After a completed Setup phase, watch for a 13-count. This indicates a higher probability of trend reversal.
  3. Monitor support and resistance levels (TDST lines): Use the TDST lines as potential entry and exit points and stop-loss levels.
  4. Combine with other technical analysis tools: Enhance the effectiveness of the TD Sequential by using it in conjunction with other technical indicators or price patterns.

Advantages of the TD Sequential

  1. Applicable across various timeframes and assets: The TD Sequential can be used on any financial-traded asset and on multiple timeframes, making it a versatile tool for traders.
  2. Early identification of trend reversals: The TD Sequential allows traders to enter or exit positions ahead of significant market moves by identifying potential exhaustion points.
  3. Clear, quantifiable signals: The numerical values generated by the TD Sequential provide easily interpretable signals, reducing the subjectivity often associated with technical analysis.

Limitations of the TD Sequential

  1. No guarantee of price reversal: While the TD Sequential indicates potential trend reversals, it does not guarantee that they will occur. This can lead to false signals and potential losses.
  2. Dependency on historical data: Like other technical analysis tools, the TD Sequential relies on historical price data, which may not always indicate future price movements.
  3. Lack of context: The TD Sequential focuses solely on price action, ignoring other market factors such as news events, economic data, and investor sentiment.

The bottom line

The TD Sequential is a valuable technical analysis tool that can help traders identify trend exhaustion and potential price reversals. By understanding the calculation and interpretation of the TD Sequential, traders can incorporate it into their trading strategies to enhance their market timing. However, it is vital to recognize the TD Sequential’s limitations and use it in conjunction with other technical and fundamental analysis tools. By doing so, traders can develop a more comprehensive and practical approach to navigating the financial markets.

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Counting and Numbering Systems: An Overview A Comprehensive Guide to TheSTRAT: Trading Strategy for the Modern Trader