The DeMark Trendline Trader indicator plots Tom DeMark’s sequential support and resistance lines on a price chart. It serves as a visual technical analysis tool for traders using DeMark’s concepts within their trading.
What is the DeMark Trendline Trader Indicator?
This indicator automates the plotting of trendlines based on Tom DeMark’s methods. DeMark’s work identified that trendlines drawn from sequential swing pivot highs/lows tended to act as dynamic support and resistance levels.
The indicator applies DeMark’s formulas to plot these trendlines on the chart automatically rather than having to draw them manually.
It also alerts traders when the price action reaches and breaks these trendlines, signaling potential reversals per DeMark’s theories.
Overview of How it Works
The indicator uses swing pivots and DeMark’s calculations to proactively plot trendlines into the future on the chart. When price reaches a projected trendline, the trader can watch for bounces or rejections to trigger buy and sell trades.
Breaks of the trendlines suggest the support/resistance has failed, prompting stop outs or reversal trades. The trader also has visual structure on the chart showing DeMark levels.
Basis of the Indicator – Tom DeMark’s Sequential System
Tom DeMark’s indicators including the sequential, combo and trendline methods are based on his in-depth research into market rhythms, swing points and momentum.
The sequential indicator identifies when a swing high/low is exhausted, signaling impending reversals. The combo oscillator adapts this into a momentum style indicator.
DeMark observed trendline support/resistance levels derived from sequential pivots revealed market structure. Plotting these trendlines creates easily visible structure on the chart.
The DeMark Trendline Trader builds on these concepts to deliver an automated indicator of DeMark’s trendlines for traders to reference.
Benefits of Using the Indicator
Some benefits include:
- Automated identification of DeMark trendline levels rather than manual drawing
- Plot future levels in advance to prepare for potential turning points
- Entries, exits and stops based on reactions at trendline levels
- Gauge exhaustion as trendlines are tested repeatedly
- Trade breaks of trendlines when sequential signals align
Understanding the DeMark Indicators
To understand the trendline trader indicator, it helps to first examine Tom DeMark’s key indicators:
This indicator identifies when a swing high or low is complete based on a set of price pattern counting rules. The completion of the sequence signals an exhaustion of the trend and impending reversal.
After 5, 13 or 9 candles form according to the rules, a numbered “Setup” is generated. The next candle to trade beyond the extreme of the setup range confirms the sequential signal, plotted as a numbered “Perfected” arrow.
Traders watch for these signals to enter reversal trades, taking longs on bullish sequences and shorts on bearish sequences.
This indicator adapts the TD Sequential into an oscillator format for easier visualization. It oscillates between 0 and 100 similar to the RSI.
Readings over 70 indicate overbought conditions and below 30 suggests oversold. Traders look for combo crossovers, failures swings and divergences to anticipate reversals.
The combo confirms what the sequential indicator predicts using momentum style interpretation.
This DeMark method involves manually plotting trendlines connecting sequential label swing highs and lows. These lines often act as support and resistance due to their basis around the sequential turn signals.
The trendline trader indicator automates the plotting of DeMark trendlines on the chart without needing to draw them manually.
How the DeMark Trendline Trader Indicator Works
The DeMark Trendline Trader automatically draws sequential trendlines on the chart and monitors price action around these levels.
Plots DeMark Trendlines on Chart
Based on formulas applied to pivot highs and lows, the indicator calculates projected trendline points and draws the lines on the chart extending into the future. Updates occur periodically to account for new market developments.
The lines act as visual structure highlighting potential support and resistance.
Monitors Price Action Around Lines
As price moves towards a projected trendline, the trader watches for bounces or breaks at the level. Candle closes, wicks and bodies provide clues about reactions at the lines.
Bounces suggest the lines are holding as support/resistance. Breaks imply a failure and need to exit existing trades or consider reversal trades.
Alerts Traders to Breaks and Rejections
The indicator can also provide alerts when price action reaches or breaks a projected trendline. This Quantifies rejects or breaks rather than just eyeballing the chart.
With alerts, traders don’t need to manually watch the lines and can wait for automated alerts to signal trades.
Key Parameters and Settings
The indicator has a variety of settings:
- Number of Days: Days into future for projection
- Trendline Type: Highs, lows, high/low, close
- Line Style: Display, width, color
- Alert Notifications: Email, SMS, pop-up when reached
- swing sensitivity for pivots
Trading With the Trendline Trader Indicator
There are some ways traders can apply the indicator when trading:
Trading Bounces Off DeMark Trendlines
Price reaching a trendline and reversing back shows the projected support/resistance held. This suggests entering a bounce trade in the direction of the trendline rejection. Stop loss placed beyond the trendline.
Fading Breaks of Trendlines
If price breaks a trendline but quickly reverses back across it, this indicates a false breakout. Traders can fade the initial break and enter in the revert-back direction, using trendline as stop level.
Planning Entries and Stop Losses
Trendlines provide clear definition of trade risk points. Long entries just above lines with stops below or shorts below lines with stops above. Risk contained to fixed levels.
Managing Open Trades at Trendlines
As an open position moves towards an active trendline, traders may consider closing some or all of the trade before a potential bounce or break occurs.
Combining With Other Indicators
While DeMark trendlines provide trade ideas, confirmation from other indicators creates an edge:
Using with TD Sequential for Turn Signal Confirmation
Ideally trendline bounces and breaks should align with bullish/bearish sequential counts for highest probability trades. The combined indicators confirm each other.
Adding TD Combo for Overbought/Oversold Interpretation
As trendlines are tested repeatedly, TD combo can identify overbought/oversold readings suggesting exhaustion ahead of breaks. Divergences also signal potential change.
Incorporating Other Technical Indicators
All standard charting tools can augment signals. For example MACD crossovers, stochastic extremes and RSI divergences help validate bounces or breaks.
Optimizing the Indicator Parameters
Modifying indicator settings to match the instrument and timeframe can improve performance:
Fine Tuning Settings for Market and Time Frame
Faster or slower settings for pivot lookbacks and trendline projections adapt the indicator to different market behaviors and time compressions.
Experimenting with Projection Days
The projected trendline days setting balances visibility against sensitivity. Longer projections are visible but lag price changes. Shorter projections respond quickly but can whipsaw.
Choosing Number of Trendlines to Plot
Cluttering the chart reduces clarity. Limit plotted trendlines to the most significant based on sequential signals, combo level, or trader preference.
Forward Testing the Indicator
Traders should forward test customized settings before applying in live trading to experience how signals perform in historical examples.
Strengths and Limitations of the Indicator
The DeMark trendline trader has some pros and cons to consider:
Benefits of Plotted DeMark Trendlines
- Provides visual structure on the chart
- Clear visibility of projected support and resistance
- Quantifies bounces and breaks at levels rather than visual estimate
Enhances Manual Trading and Alerts
- Levels to monitor or trade from visually on the chart
- Optional alerts for automated monitoring of trendline tests
Automated Trading Based on Lines Possible
- Trendline levels and price action can be programmed for automated trading
- Mechanical system entries, exits and stops
Lagging Nature Limits Predictive Ability
- Lines are calculated from past price action, not projected into the future
- Price may break through before indicator updates trendlines
Subject to False Breaks Like Any Indicator
- No indicator is always perfect in dynamic markets
- Whipsaws and false breaksouts occur around projected levels
Conclusion and Summary
The DeMark Trendline Trader provides automated plotting of Tom DeMark’s trendlines for traders to incorporate into analysis and trade planning. Visual structure, bounce/break trade signals and clear risk points are benefits.
In the hands of a skilled trader, the indicator adds valuable information. But as with all indicators, real skill comes from interpreting signals within broader technical and fundamental context. The indicator complements analysis rather than replacing it.
Traders succeeding with Tom DeMark’s original indicators may find the trendline trader a useful enhancement. For new traders, studying DeMark’s concepts would help gain proficiency applying the indicator. Robust testing and practice creates expertise to use its potential value.