Unique indicator by DeMark: TD Moving Average
Dear friends!
I continue describing the collection of Thomas DeMark’s forex indicators.
In my previous articles, I have already explained such tools as
Today, I going to deal with one of the most commonly used indicators in the trading world. This is the moving average MA, but it is not just a usual MA, it is Thomas DeMark Moving Average (TD Moving Average). Anyone, who has ever employed this indicator, knows that it, on the one hand, is rather simple to use and sends quite clear signals; on the other hand, it has a number of significant drawbacks, as it is ineffective in high volatility markets or nontrending markets. In addition, the moving average is a lagging indicator, therefore relying on its signals alone in its usual form is not the most effective trading strategy.
Of course, you can increase the period of the Moving Average to reduce the number of false signals, but in this case the lag will be even greater and there will not be much sense in such signals. If you significantly reduce the MA period, the lag from the price will be minimal, however, the number of false signals will sharply increase.
Thomas DeMark invented a new kind of the Moving Average indicator. He tried to maintain the advantages of the indicator but eliminated its drawbacks. That is how there appeared two indicators: TD Moving Average I and TD Moving Average II.
TD Moving Average I was originally designed as a trailing stop, and it was to indicate the level to exit a trade. However, the indicator in fact has become very efficient in identifying the trends in the market and finding out not only the right exit levels but the entry points as well. At the same time, like all other TD indicators, TD Moving Average I is drawn based on relative price movements, rather than absolute values, and therefore, no separate settings for each timeframe are required. So, in order to avoid a time-lag, you just need to track the indicator on shorter timeframes.
Before I start explaining the indicator, I want to thank @GravityWave, who made this indicator available to everyone in the tradingview library.
Let us study the case when a moving average signals a bullish trend
It occurs when the current bar’s low is greater than all previous 12 lows.
If this condition is met, the indicator analyzes the current price bar and three more in future. If during the period of these four bars, the low isn’t higher than the 12 previous lows, the line disappears.
If during one of these four bars, the low is higher than 12 previous lows, TD Moving Average I will be active during at least four next bars.
It is clear from the above figure that once there is a bar whose low is greater than 12 previous lows, there starts a bullish TD Moving Average starting from the 12th bar
The chart above provides a good example of the rule when the moving average is extinguished, i.e. the bullish trend is cancelled. You see that the low of June 27 is lower than the previous 12 lows and the next three bars can’t consolidate their lows above the 12 previous ones. Therefore, as soon as there are four bars complete, there is a reversal signal at the fourth bar and the bullish trend extinguishes.
In general, if we know how this indicator is constructed in such cases, as it is demonstrated in the chart above when the low is much lower than the previous ones, we can already understand that the lows of the next three bars will hardly exceed the highest low of the last 12 bars. So, without wasting time, we can already look for a point to exit a trade.
If we go back to our example, it is clear at already the third bar that the highest low at 11 741 USD won’t be broken through, and so, one could take profit from the long trade, rather than wait until the fifth bar closes (marked with a red tick). This case illustrates how a thorough understanding of the indicator work principle helps employing it as effectively as possible.
When there is a downtrend, a bearish moving average is built according to a similar calculation formula. Only 12 highs are analyzed instead of the lows.
It is clear from the above chart that once there is the 13th bar whose high is lower than 12 previous highs, then, starting from the 12 bar, there starts a bearish TD Moving Average, which is a sell signal.
If we apply the above conditions to the same chart, there will be an interrupted moving average, where the green line drawn under the lows will indicate a bullish market, and the red one, above the highs, indicates a bearish market. In this case, according to the classics, the entry point will be the first candle in the trend (indicated by the arrow in the chart above), and the exit point will be at the close of the bar after the projection crosses the last value of the bullish (bearish) TD moving average (the points are marked with crosses in the chart above).
As it is clear from the chart above, if the market is trading flat, such trades don’t yield significant profits, and may often result in losses. To rule out such cases, one should employ this indicator together with other DeMark's tools, including TD Moving Average II.
This indicator is displayed in the chart above (thanks parsak21 for free access to the tool!). TD Moving Average II is made up of two simple moving averages (SMA) that are drawn based on the close. The short-term MA is a 3-period line, the long-term one is a 34-period SMA. Whereas TD Moving Average I needs a specific condition to be met in order to appear on the chart (so that it can indicate the market is trending), TD Moving Average II is always displayed. The tree-period moving average is drawn in comparison to the close level two bars ago, and the 34-period moving average is drawn based on the previous bar. Unlike traditional moving averages, however, TD Moving Average II applies a rate of change (ROC), to each of the averages. I described the rate of change (ROC).
Therefore, the market sentiment is purely bullish when the ROC is in the buyer zone, and the short-term three-period MA is above the thirty-four–period moving average. In the above figure, I highlighted such zones with green. As you see, they cover most of the bullish trend.
When the ROC is in the neutral area or in the seller zone, one mustn’t buy. Those, who have long positions open, should take the profit, even if the short-term MA is still above the long-term 34-period one.
Finally, if you apply the TD Moving Average I, the TD Moving Average II and the ROC together, you will have quite a safe trading strategy. A buy entry will be indicated when all the above tools send a buy signal (marked with a green arrow). However, as MAs are a lagging indicator, I recommend looking for an exit point in short-term timeframes. In our example, the entry point is in the daily timeframe. So, the exit point will be signalled when the TD Moving Average I indicates a bearish trend on the H4 timeframe.
As you see from the chart above, there are hardly any false exit signals on the historical data. In addition, we have always been in the trend and taken the most profits from the bullish trend. We shall see how this strategy will perform in future. So far, I have finished describing another tool by Thomas DeMark.
I will describe other useful DeMark's indicators and explain how to apply them to BTCUSD trading in my next articles.
Subscribe not to miss the continuation!
I wish you good luck and good profits!
Great regards!
Mikhail @Hypov
________________________________________
PS: If you agree with my ideas, write “+” in the comments; if you don’t agree, put “-”. If you liked the post, just write thank you, and don’t forget to share the post. It is easy for you and I will be very pleased :)
I continue describing the collection of Thomas DeMark’s forex indicators.
In my previous articles, I have already explained such tools as
Today, I going to deal with one of the most commonly used indicators in the trading world. This is the moving average MA, but it is not just a usual MA, it is Thomas DeMark Moving Average (TD Moving Average). Anyone, who has ever employed this indicator, knows that it, on the one hand, is rather simple to use and sends quite clear signals; on the other hand, it has a number of significant drawbacks, as it is ineffective in high volatility markets or nontrending markets. In addition, the moving average is a lagging indicator, therefore relying on its signals alone in its usual form is not the most effective trading strategy.
Of course, you can increase the period of the Moving Average to reduce the number of false signals, but in this case the lag will be even greater and there will not be much sense in such signals. If you significantly reduce the MA period, the lag from the price will be minimal, however, the number of false signals will sharply increase.
Thomas DeMark invented a new kind of the Moving Average indicator. He tried to maintain the advantages of the indicator but eliminated its drawbacks. That is how there appeared two indicators: TD Moving Average I and TD Moving Average II.
TD Moving Average I was originally designed as a trailing stop, and it was to indicate the level to exit a trade. However, the indicator in fact has become very efficient in identifying the trends in the market and finding out not only the right exit levels but the entry points as well. At the same time, like all other TD indicators, TD Moving Average I is drawn based on relative price movements, rather than absolute values, and therefore, no separate settings for each timeframe are required. So, in order to avoid a time-lag, you just need to track the indicator on shorter timeframes.
Before I start explaining the indicator, I want to thank @GravityWave, who made this indicator available to everyone in the tradingview library.
Let us study the case when a moving average signals a bullish trend
It occurs when the current bar’s low is greater than all previous 12 lows.
If this condition is met, the indicator analyzes the current price bar and three more in future. If during the period of these four bars, the low isn’t higher than the 12 previous lows, the line disappears.
If during one of these four bars, the low is higher than 12 previous lows, TD Moving Average I will be active during at least four next bars.
It is clear from the above figure that once there is a bar whose low is greater than 12 previous lows, there starts a bullish TD Moving Average starting from the 12th bar
The chart above provides a good example of the rule when the moving average is extinguished, i.e. the bullish trend is cancelled. You see that the low of June 27 is lower than the previous 12 lows and the next three bars can’t consolidate their lows above the 12 previous ones. Therefore, as soon as there are four bars complete, there is a reversal signal at the fourth bar and the bullish trend extinguishes.
In general, if we know how this indicator is constructed in such cases, as it is demonstrated in the chart above when the low is much lower than the previous ones, we can already understand that the lows of the next three bars will hardly exceed the highest low of the last 12 bars. So, without wasting time, we can already look for a point to exit a trade.
If we go back to our example, it is clear at already the third bar that the highest low at 11 741 USD won’t be broken through, and so, one could take profit from the long trade, rather than wait until the fifth bar closes (marked with a red tick). This case illustrates how a thorough understanding of the indicator work principle helps employing it as effectively as possible.
When there is a downtrend, a bearish moving average is built according to a similar calculation formula. Only 12 highs are analyzed instead of the lows.
It is clear from the above chart that once there is the 13th bar whose high is lower than 12 previous highs, then, starting from the 12 bar, there starts a bearish TD Moving Average, which is a sell signal.
If we apply the above conditions to the same chart, there will be an interrupted moving average, where the green line drawn under the lows will indicate a bullish market, and the red one, above the highs, indicates a bearish market. In this case, according to the classics, the entry point will be the first candle in the trend (indicated by the arrow in the chart above), and the exit point will be at the close of the bar after the projection crosses the last value of the bullish (bearish) TD moving average (the points are marked with crosses in the chart above).
As it is clear from the chart above, if the market is trading flat, such trades don’t yield significant profits, and may often result in losses. To rule out such cases, one should employ this indicator together with other DeMark's tools, including TD Moving Average II.
Therefore, the market sentiment is purely bullish when the ROC is in the buyer zone, and the short-term three-period MA is above the thirty-four–period moving average. In the above figure, I highlighted such zones with green. As you see, they cover most of the bullish trend.
When the ROC is in the neutral area or in the seller zone, one mustn’t buy. Those, who have long positions open, should take the profit, even if the short-term MA is still above the long-term 34-period one.
Finally, if you apply the TD Moving Average I, the TD Moving Average II and the ROC together, you will have quite a safe trading strategy. A buy entry will be indicated when all the above tools send a buy signal (marked with a green arrow). However, as MAs are a lagging indicator, I recommend looking for an exit point in short-term timeframes. In our example, the entry point is in the daily timeframe. So, the exit point will be signalled when the TD Moving Average I indicates a bearish trend on the H4 timeframe.
As you see from the chart above, there are hardly any false exit signals on the historical data. In addition, we have always been in the trend and taken the most profits from the bullish trend. We shall see how this strategy will perform in future. So far, I have finished describing another tool by Thomas DeMark.
I will describe other useful DeMark's indicators and explain how to apply them to BTCUSD trading in my next articles.
Subscribe not to miss the continuation!
I wish you good luck and good profits!
Great regards!
Mikhail @Hypov
________________________________________
PS: If you agree with my ideas, write “+” in the comments; if you don’t agree, put “-”. If you liked the post, just write thank you, and don’t forget to share the post. It is easy for you and I will be very pleased :)
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