The TD Sequential indicator is a popular trading tool developed by market technician Tom DeMark. It can help traders identify potential turning points in the market and take advantage of reversal opportunities. This comprehensive guide explains what the TD Sequential is, how it works, and most importantly – how traders can use it to make better trading decisions.
What is the TD Sequential Indicator?
The TD Sequential indicator is a technical analysis tool used to identify potential price reversals and counter-trend movements. It was created in the 1990s by renowned market technician Tom DeMark.
TD Sequential aims to make sense of market fluctuations and identify opportunities to trade against the prevailing trend. It does this by looking for completed bar counts and price patterns. The indicator displays numeric counts alongside price bars to highlight completed bullish or bearish sequences.
These completed count patterns can signal when an upside or downside price move may be exhausting itself and poised to reverse. Traders watch for TD buy and sell setups to anticipate and trade potential trend reversals.
How Does TD Sequential Work?
The TD Sequential indicator is based on a system of counting bars to identify specific patterns that precede potential reversals. Here is an overview of how it works:
- Counts price bars from low to high (uptrends) or high to low (downtrends)
- Analyzes how bars close compared to the prior bar’s close
- Labels bars as either “up” or “down” bars based on the close
- Counts consecutive up or down bars until conditions are met for completed bullish/bearish counts
- Sequential bullish counts start at 1 and increment, bearish counts start at 9 and decrement
- A bullish setup (buy signal) forms when a count sequence completes at 9
- A bearish setup (sell signal) forms when a count sequence completes at 13
The completed count patterns signal potential exhaustion of the current trend. Traders then watch for confirmation of an actual reversal through conventional price chart analysis.
TD Sequential Indicator Settings
The TD Sequential indicator has a few customization settings traders can adjust:
- Bar Interval: The time frame of the price bars being counted, e.g. 5-minute, 1-hour, daily, etc.
- Length: The number of bars counted in a sequence before registering as completed. Default is 9 bars for buys, 13 bars for sells.
- Count Condition: The bar close requirement to qualify as an up/down bar. Default is 2/3 of the prior bar’s range.
These settings allow traders to fine tune the indicator to their preferred trading style, market, and chart timeframe.
TD Buy and Sell Setups
The TD Sequential indicator is ultimately used to identify buy and sell setups for potential reversals:
TD Buy Setup (Bullish)
A TD buy setup forms when the indicator completes a 9-count sequential bullish pattern. This suggests upside exhaustion.
TD Sell Setup (Bearish)
A TD sell setup forms when the indicator completes a 13-count sequential bearish pattern. This suggests downside exhaustion.
| Setup | Description |
|---|---|
| TD Buy Setup | 9 consecutive close higher bars signaling uptrend exhaustion |
| TD Sell Setup | 13 consecutive close lower bars signaling downtrend exhaustion |
Traders watch for completed TD buy or sell counts to anticipate upcoming reversals. However the setups themselves don’t necessarily trigger trades. They act more as alerts to start analyzing the price chart for signs of actual trend reversal.
Trading TD Sequential Buy and Sell Signals
The TD Sequential indicator highlights completed buy/sell sequences to make traders aware of potential turning points. But how do traders actually use these signals to take trades?
Here are some guidelines for trading TD setups:
- Use setups as alerts, not automatic trade triggers – TD signals indicate possible reversals ahead but require chart confirmation.
- Confirm reversal with candlestick / chart patterns – Look for bullish/bearish engulfing patterns, pinbars, moving average crosses, wedge breaks etc. following TD setups.
- Use other indicators for additional confirmation – Oscillators like RSI or momentum indicators can confirm trend exhaustion.
- Establish trigger levels for entry / stop loss – Set specific price levels for trade entry and stop loss based on technical analysis.
- Manage risk – Use proper risk management with stop losses on all trades. TD setups will not be perfect, manage losses on invalid signals.
Here are some examples of trading TD buy and sell signals with confirmation:
TD Sequential Trading Strategies
The TD Sequential indicator can be incorporated into many trading strategies and styles. Here are a few approaches to using TD buy/sell signals:
Reversal Trading
Look for TD setups in the opposite direction of the prevailing trend. Enter on reversal candle confirmation and set stop below bullish patterns or above bearish patterns. Target appropriate risk/reward based on chart patterns.
Pullback Trading
After a TD setup forms, wait for a pullback to a support or resistance level in the new trend direction. Enter on continuation signals like pinbar reversals or momentum shifts. Can offer a better risk/reward.
Breakout Trading
TD setups often form at important price chart levels. Watch for breakouts with momentum following TD signals. Enter on clear breaks of trendlines, channels, or chart patterns like triangles, flags, wedges.
Adding Confluence
Combine TD setups with other confluent indicators or events. For example, a TD buy setup on bad news like an unfavorable GDP report may have a higher probability of reversing the downtrend.
Tips and Tricks for Trading TD Sequential
Here are some useful tips for getting the most out of the TD Sequential indicator:
- Scan multiple timeframes to identify high probability setups that occur in alignment across higher and lower timeframes.
- Focus on TD setups that form at key chart levels or patterns for added confluence. Levels include round numbers, prior highs/lows, 20/50/200-day moving averages.
- Be aware of upcoming major news events that could accelerate or invalidate TD setups. Avoid trading TD signals right before major known events.
- Adjust the “Count Condition” setting to be more conservative for choppy markets, more aggressive for trending markets. This can reduce whipsaws.
- Use TD Sequential along with other confirmation indicators like RSI to gauge momentum. RSI reaching overbought/oversold can validate exhaustion signals.
- Beware trades in the same direction as the TD signal. For example, going long on a TD 9 sell setup often results in being stopped out on the eventual reversal.
- Similarly, fading right at a TD setup is risky. Look for some confirmation of the actual trend change before trading a reversal.
- Manage trades actively using trailing stops, profit targets and risk/reward analysis. TD signals won’t be perfect, adapt stops and be ready to close trades if invalidation signals develop.
Pros and Cons of TD Sequential
Here is an overview of the key advantages and limitations of this indicator:
As with any indicator, TD Sequential works best when combined with overall technical analysis of the price chart. It should not be relied on as an isolated trading system. But it can serve as a useful trigger for identifying high probability reversals.
Frequently Asked Questions About TD Sequential
Here are answers to some common questions about using Tom DeMark’s indicator:
What timeframes work best for TD Sequential?
TD Sequential can be used on any timeframe from 1-minute charts up to weekly or even monthly charts. The best timeframes tend to be those with the clearest trends, like 4-hour, daily, and weekly charts. Faster timeframes have more noise.
Does TD Sequential work for forex, stocks, crypto, etc?
Yes, the TD indicator can work on any liquid market with clear price bars, including forex currency pairs, stocks, indices, commodities, and cryptocurrencies. As usual, cryptocurrencies tend to be more volatile and noisy.
Can TD Sequential signals be automated or alerted?
Many trading platforms have functionality to create alerts or automated trading rules based on TD Sequential counts. For example, alerts when a 9 or 13 count completes, or automated orders to trade the subsequent reversal. Traders can also program custom indicators or Expert Advisors in MetaTrader 4/5 to detect TD setups and signal trades.
Is the TD Sequential indicator free or does it cost money?
TD Sequential is included standard in many charting packages and trading platforms like MetaTrader and TradingView. Some sites also offer the indicator for free download. So traders can generally access TD Sequential for free, there is no proprietary charge to use it.
Does TD Sequential only work for reversals or also trend trades?
TD Sequential specializes in identifying potential trend reversals. However, traders can also use TD counts to gauge overextensions of trends and trade pullbacks in the trend direction. On lower timeframes, TD can generate countertrend reversal signals.
What are some common mistakes when using the TD Sequential indicator?
Common mistakes include treating TD signals as automatic entry triggers rather than as alerts for further confirmation. Also, improperly using TD counts against the prevailing trend instead of for reversals. And lastly, not managing risk by confluencing signals and using stops, causing larger than necessary losses on invalid setups.
Conclusion
The TD Sequential indicator offers traders a systematic method to identify potential turning points and trend reversals in the market. By understanding how to trade TD buy and sell setups, traders can catch major upside and downside moves at critical exhaustion points. However, TD signals should be confluenced with other forms of technical analysis for the highest probability setups. Use the indicator as part of an overall trading plan, not in isolation. With proper risk management, TD Sequential can be a valuable addition to any trader’s charting toolbox.
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