TRADING STRATEGIES

trendlines::
Drawing objective trendlines
TD Lines
Although traditional trendlines are notoriously
notoriously subjective, it is
is possible
possible to
to develop
develop trendline-drawing
trendline-drawing
rules and trading guidelines that
that can be applied consistently
consistently and
and objectively.
objectively.

BYACTIVE
BY ACTIVE TRADER STAFF
TRADER STAFF

T echnicians use trendlines

trendlines tto identify trends
trends side
echnicians use o identify side ofof thethe chart
chart and and connect
connect the the two
two most
most recent
recent Level
Level OneOne
and determine when
and determine when they they end
end or
or reverse.
reverse. TheThe TD Price Point
TD Price Point lows.
lows. (Starting
(Starting from from the
the right
right side
side of o f the
the
only problem w
only problem with traditional trendlines
i t h traditional trendlines iis s chart
chart insures
insures thatthat the
the most
most recent
recent price
price history
history is
is being
being used
used
they
they are are subjective
subjective 1010 traders
traders could
could look
look at
at to identify the
to identify the trend.)
trend.) If I f the
the TD Demand Line
T D Demand Line is is sloping
sloping
aa chart
chart andand drawdraw 10 10 different
different trendlines.
trendlines. Proper
Proper trendline
trendline upward,upward, the the current
current trend
trend is is up.
up. A A horizontal
horizontal TD TD Demand
Demand
application
application and analysis require
and analysis require consistent,
consistent, objective
objective rules.
rules. Line
Line reflects
reflects aa sideways
sideways market. market.
The TD-Line technique
The TD-Line technique was was developed
developed by by Tom
Tom DeMark
DeMark AA TD
TD Supply
Supply Line Line isis plotted
plotted usingusing the
the same
same procedures.
procedures.
and
and isis detailed
detailed iin n hishis books
books The The NewNew Science Technical Start
Science ooff Technical Start from
from the the right
right side
side of of the
the chart
chart and
and look
look for
for the
the twotwo
Analysis (John
Analysis (John Wiley
Wiley & & Sons, 1994) and
Sons, 1994) and DeMark
DeMark on on Day Trading most
Day Trading most recent
recent Level
Level One One TD TD Price
Price Point
Point highs.
highs. Draw
Draw the the sup-
sup-
Options (McGraw-Hill, 1999).
Options (McGraw-Hill, 1999). TThe complete methodology
h e complete methodology ply ply line
line along
along these
these twotwo highs.
highs.
includes objective rules
includes objective rules ffor plotting
o r plotting
these trendlines, rules
these trendlines, rules ffor validating
o r validating FIGURE 1 TD
FIGURE TO SUPPLY AND DEMAND LINES
them, and rules to determine whether whether to to
trade or fade
trade or fade a a trendline
trendline break.break. These
These TD SupplySupply and
and Demand
Demand Lines are plotted plotted by by connecting
connecting Level
Level One
One TDTD
highs
highs and lows, respectively. The breakout breakout occurred
occurred on
on Bar
Bar 4. Bar
Bar 33 closed
closed
To
To accomplish
accomplish this, this, TD TD Lines require
Lines require
down,
down, which met met the
the first
first qualifier
qualifier for
for aa trade.
trade.
aa trendline
trendline tto connect "TD
o connect Points
T D Points"
7
(which
(which aare re m more
o r e ccommonly called
o m m o n l y called Euro/U.S. dollar (EURIUSD), 60-minute 1,2630
pivot
"pivot" hhighsi g h s oorr lows,lows, oorr "swing

Itll
swing"
highs
highs oorr lows).
lows). A A TTD Point high
D Point high is is aa 1.2620
high preceded aand
high preceded followed bby
n d followed y aan
n TOsupply line
equal number ooff lower
equal number lower highs.
highs. A A TTDD 1,2610
Point
Point low
low is is the
the opposite
opposite a a low
low sur-
sur-
rounded
rounded by by an an equal
equal number
number of of higher
higher 1.2600
lows. For example, a
lows. For example, a "Level One" T DLevel One TD
Point
Point llowo w hashas oneone higher
higher llow before
o w before 1,2590
and after it;
and after it; aa Level
Level Two Two TD TD Point
Point low low
has two higher
has two higher lowslows beforebefore it it and
and twotwo 1- 1.2580
higher lows after it,
higher lows after it, and so on. and so on.
TD Lines of
TD Lines of different degrees of
different degrees of sig-
sig- 1.2570
nificance are constructed by connect- T i l l. TO demand line
nificance are constructed b y connect-
ing
ing TD
TD Point
Point highs
highs or or lows
lows of of the
the same
same I t .
1.2560
degree i.e., connecting
degree i.e., connecting Level Two Level Two 1
TD Point l lows 1,2550
TD Point o w s oorr connecting
connecting Level Level
Three
Three TDTD Point
Point highs.
highs.
For example, to plot 1,2540
For example, to plot a a Level
Level One One TD TD
Demand
Demand Line Line (Figure
(Figure 1), 1), which
which is is used
used 120.0:00 14:00 1 2 0 . 7 : 0 0 1 1 1 : 0 0 I 20.16:00 I 20.20:00
Source:
Source: QCharts
()Charts
to identify support, start from
to identify support, start from the right the right

24
24 S e p t e m b e September
r 2006
2006 CURRENCY
CURRENCY TRADER
TRADER
TABLE 11
TABLE TO LINE
TD LINE QUALIFIERS
QUALIFIERS
If any of the four qualifiers are true, the trendline break is valid.

Upside breakout qualifiers

Qualifier 1: The
The price bar prior to an
an upside breakout
breakout must
must be
be aa down
down close.
Qualifier 2: The
The current
current price bar's
bars open must
must be greater
greater than both the
the current
current TD
ID Supply
Supply Line
Line and
and the
the
previous bars close and must then trade at least one tick higher.
previous price bar's
Qualifier 3: The
The previous price bars
bar's close plus the previous
previous bars
bar's buying
"buying pressure
pressure" must
must be
be below
below the
the current
current
price bar's
bars TD
ID Supply Line price level.
Qualifier 4: TThe
h e current price bars
bar's open must be above both the previous two two price
price bars
bars' closes,
closes, and the
the
current price bar's
bars TD Supply Line must be above the previous price bars bar's high.
Downside breakout qualifiers
Qualifier 1: The
The price bar prior to a downside breakout
breakout must
must be
be an
an up
up close.
Qualifier 2: TThe
h e current price bars
bar's open must be
be less than both the current
current TD
I D Demand
Demand LineLine and
and the
the previous
previous
price bars close and must then trade at least one tick lower.
price bar's
Qualifier 3: The
The previous price close minus the previous
previous bars
bar's selling
"selling pressure
pressure" must
must be
be above
above the
the current
current
price bar's
bars TD
ID Demand Line price level.
Qualifier 4: TThe
h e current price bars
bar's open must be below both
both the previous
previous two
two price
price bars
bars' closes,
closes, and
and the
the
current price bar's
bars TD Demand Line must be below the previous price bars bar's low.

Source: DeMark on Trading Options (McGraw-Hill, 1999)

TD
TO breakout qualifiers breakout
breakout would would be be too
too late,
late, except
except in in special
special cases.
cases.
Most
Most books describing trendline
books describing trendline analysis
analysis wouldwould stopstop atat this
this For
For example,
example, Qualifier
Qualifier 11 forfor the
the breakout
breakout of of aa TD
TD Supply
Supply
point, leaving the
point, leaving the technician
technician with with a a few
few examples
examples and and per-
per- Line
Line requires
requires the the previous
previous bars
bar's close
close toto be
be aa down
down close.
close. In In
haps
haps aa recommendation
recommendation to to use
use "other
other indicators"
indicators tto con-
o con- other words, buying
other words, buying oon an intraday
n an intraday basisbasis after
after two (or
t w o (or
firm
firm thethe likelihood
likelihood of of aa break
break of of aa trendline
trendline by by the
the price
price as as more)
more) consecutive
consecutive up up days
days is is risky.
risky.
the signal to
the signal take a
to take a trade.
trade. However,
However, Qualifier
Qualifier 22 posits
posits that
that aa gap-up
gap-up opening
opening aboveabove
There
There are are ffour qualifiers tto
o u r qualifiers validate T
o validate TD Demand and
D Demand and aa TD
TD Supply
Supply Line Line accompanied
accompanied by by follow-through
follow-through buying buying
Supply Line penetrations; if any qualifier
Supply Line penetrations; if any qualifier is true, the trend- is true, the trend- is
is aa sign
sign ofof strength
strength andand should
should traded
traded accordingly.
accordingly.
line break is
line break is considered
considered a a valid
valid signal. Table 1
signal. Table 1 lists
lists the
the four
four Qualifier
Qualifier 3 is designed to avoid buying
3 is designed to avoid buying aatrendline
trendline break-
break-
qualifiers
qualifiers for upside penetrations of TD Supply Lines and
for upside penetrations of TD Supply Lines and out
out after a market has already demonstrated aa great
after a market has already demonstrated great deal
deal of of
downside
downside penetrations
penetrations of of TD
TD Demand
Demand Lines. Lines. buying
buying has has exhausted
exhausted itself.
itself.
The
The third
third qualifiers
qualifiers use use the
the terms
terms buying
"buying pressure
pressure" and and Qualifier
Qualifier 44 is is another
another go "go with
with thethe strength
strength" rule rule inin that
that
selling pressure. Buying pressure
"selling pressure." B u y i n g pressure i s t h e difference is the difference it implies an exceptionally strong opening
it implies an exceptionally strong opening has occurred. has occurred.
between
between a a bars close and
bar's close and itsits true
"true low,
low," which
which is is the
the lower
lower If none ooff the
If none the qualifiers
qualifiers aare met, tthe
r e met, h e TD Supply or
T D Supply or
of that bars low or the previous bars
of that bar's low or the previous bar's close. Selling pres- close. Selling pres- Demand
Demand Line breakout should be faded. (Rarely do
Line breakout should be faded. (Rarely do books
books
sure
sure is the difference between the previous bar's close and
is the difference between the previous bars close and detailing
detailing trendline
trendline analysis
analysis offer
offer aa reversal
reversal trading
trading strategy
strategy
its true high,
its true high, which
which is is the
the higher
higher of of that bars high
that bar's high or or the
the following
following the break of a trendline.) For example, fading
the break of a trendline.) For example, fading thethe
previous
previous bar'sbars close.
close. break
break o off the
the T TD Demand Line
D Demand Line in Figure 22 (i.e.,
i n Figure (i.e., buying)
buying)
In
In Figure
Figure 2 2 none
none of of the
the qualifiers
qualifiers from from Table
Table 11 were
were met.met. would
would have have been
been appropriate
appropriate for for aa short-term
short-term day day trade.
trade.
The
The high of bar A was 1.2890 and the close was 1.2833; the
high of bar A was 1.2890 and the close was 1.2833; the There
There is one problem w i t h using these f o u r qualifiers
is one problem with using these four qualifiers
bars close minus
bar's close minus its its selling
selling pressure
pressure value value waswas 1.2776,
1.2776, with
with cashcash forex
forex data:
data: Because
Because of of the
the 24-hour
24-hour nature
nature of of forex,
forex,
which was was below the TD Demand Line. the opening price of a bar is often the same
the opening price of a bar is often the same as the preceding as the preceding
Reviewing
Reviewing the the qualifiers
qualifiers reveals
reveals the the importance
importance of of deter-
deter- close
close (or (or oneone tick
tick above
above o orr below
below it). it). F
For example, tthe
o r example, he
mining whether buying or selling
mining whether buying o r selling momentum has been momentum has been upside
upside trendline break in Figure 3 failed the first three
trendline break in Figure 3 failed the first three qual-
qual-
exhausted before the penetration of
exhausted before the penetration of a TD Line that is, a TD Line that is, ifiers.
ifiers. The
The buying
buying pressure
pressure level
level for
for qualifier
qualifier 33 (1.2843)
(1.2843)was was
whether a price has already run up
whether a price has already run up a great deal before ana great deal before an above
above the TD Supply Line. However, the market opened
the TD Supply Line. However, the market opened up up
upside
upside breakout
breakout or or declined
declined aa greatgreat deal
deal before
before a a downside
downside one
one ticktick from
from thethe previous
previous bars
bar's close,
close, and
and therefore
therefore all all the
the
breakout.
breakout. I f this is the case, trading in the direction of
If this is the case, trading in the direction of the
the continued
continued on
on p.
o. 26
26

CURRENCY TRADER September

CURRENCY TRADER September 2006
2006 2 5 25
 TRADING STRATEGIES
TRADING STRATEGIES continued
continued

FIGURE 22
FIGURE - UNQUALIFIED
UNQUALIFIED TRENDLINE
TRENDLINE BREAK
BREAK

None of the four qualifiers are met. 1.2776 was the selling pressure value,
which is
which is below the TD
below the TD Demand Line.
Demand Line.

Euro/U.S. dollar (EURiLISD), daily 1.2900

mended. However, currency
mended. However, currency futures
futures
1.2850 prices,
prices, wwhich
hich d doo n not have the
o t have the same
same
open-close
open-close pproblem
r o b l e m aass ccash
a s h fforex
orex
1.2800 prices,
prices, can
can also
also bebe used.
used.

1.2750 Price
Price objectives
objectives
7
1.2776
Following
Following the the qualified
qualified breakout
breakout of of aa
1.2700 TD
TD Supply
Supply Line,
Line, anan upside
upside price
price objec-
objec-
tive
tive can
can bebe determined
determined by by calculating
calculating
the difference
difference between
between the the line
line and
and the
the

1111-11
1.2650 the
lowest
lowest lowl o w below
below it i t and
and adding
adding thatthat
1.2600 amount
amount tto o tthe breakout price
h e breakout price level
level
(Figure
(Figure 4).4). For
For aa downside
downside breakdown
breakdown

III
1.2550 below
below aa TD TD Demand
Demand Line, Line, find
find the
the dis-
dis-
tance
tance between
between the the line
line and
and the
the highest
highest
1.2500 high above it
high above i t and subtract the
and subtract the result
result
from
from the
the breakdown
breakdown price. price.
August
In
In Figure
Figure 4, 4, the
the market
market consolidated
consolidated
117 1 2 4 1 3 1 1 1 1 7 17 1 1 4
after
after meeting the price objective calcu-
meeting the price objective calcu-
Source: ()Charts
QCharts
lated
lated after
after the
the TD TD Supply
Supply Line Line break-
break-
out.
out.
FIGURE 3 QUALIFIED OR NOT?
None of the first three qualifiers were satisfied, but because the market
market opened
opened Risk
Risk management
management
one tick higher, the fourth qualifier
qualifier was validated. The breakout, however, failed. The
The TTD D LLine
i n e mmethodology
e t h o d o l o g y aalso
lso
includes
includes rules for exiting aa trade
rules for exiting trade exe-
exe-
cuted
cuted o onn aa trendline
trendline breakout.
breakout. ThereThere
are
are three situations for exiting a trade
three situations for exiting a trade
after
after aa breakout
breakout of of aa TD
TD Supply
Supply Line:
Line:

Exit
Exit ifif the
the bar
bar after
after the
the breakout
breakout bar
bar
opens below the breakout price
opens below the breakout price level. level.
1.2800
Exit
Exit ifif the
the bar
bar after
after the
the breakout
breakout bar
bar
opens below the close of the
opens below the close of the breakout breakout
bar
bar aand closes bbelow
n d closes e l o w tthe breakout
h e breakout
1.2700 price level.
price level.
Exit
Exit ifif the
the bar
bar after
after the
the breakout
breakout bar
bar
fails to exceed the high of the breakout
fails to exceed the high of the breakout
1.2600
price
price bar.
bar.

There are three

There are three rules
rules for
for exiting
exiting aa
short trade taken
short trade taken after a breakdown
breakdown
1.2500 below
below aa TD
TD Demand
Demand Line:
Line:

129 1 1 1 5 1 1 2 1 1 9 1 2 6 1 3 1 1 0 117 Exit

Exit ifif the
the bar
bar after
after the
the breakout
breakout bar
bar
Source: ()Charts
QCharts opens above the breakout price
opens above the breakout price level. level.
Exit
Exit ifif the
the bar
bar after
after the
the breakout
breakout bar
bar
criteria
criteria for
for qualifier
qualifier 4
4 were
were met.
met. But
But the
the breakout
breakout failed.
failed. opens above the close of the breakout bar and
opens above the close of the breakout bar and closes abovecloses above
Most
Most other markets close for the night, which
other markets close for the night, which can
can lead
lead to
to the
the breakout
breakout price
price level.
level.
pent-up
pent-up buying or selling that will be expressed by a strong
buying or selling that will be expressed by a strong Exit
Exit if the bar after the breakout bar fails fails to
to trade
trade below
below
up
up oorr ddown
o w n oopen
p e n tthe
h e nnext day. Accordingly,
e x t day. Accordingly, ffurther
urther the low of the breakout price
the low of the breakout price bar. bar.
research
research regarding forex prices a n d TTD
regarding forex prices and Lines iis
D Lines recom-
s recom- continued
continued on
on p.
p. 28
28

26 September
September 2006
2006 CURRENCY
CURRENCY TRADER
TRADER
111., TRADING
TRADING STRATEGIES
STRATEGIES continued
continued

FIGURE 4
FIGURE 4 UPSIDE
UPSIDE PRICE
PRICE OBJECTIVE
OBJECTIVE
At the close of
of the
the 16:00
16:00 bar
bar the
the low
low was
was 1.2575
1.2575 and
and the
the TD
TD Supply
Supply Line
Line value
value
was
was 1.2607, a difference of
of 0.0032. Adding that
0.0032. Adding that value
value to
to the breakout
breakout level
level of
of
These rules are based on the expec- the
the TD Supply
Supply Line (1.2597) set
set aa price
price target
target of
of 1.2629.
1.2629.
tation that
tation that there
there will
will be
be immediate
immediate fol- fol-
Euro/U.S. dollar (EUR/USD); 60-minute 1.2630
low-through in the expected direction.
(Considering thesethese rules
rules are are ffrom
r o m aa 1.2620
book for trading
book for trading options,
options, this this makes
makes
1 . 2 6 2 9 1 1 1 1
sense. Options are
sense. Options are aa wasting
wasting asset.
asset. 1.2610
The longer you
The longer you hold
hold an an option
option posi-
posi-
tion,
tion, tthe less llikely
h e less i k e l y iitt wwill be prof-
i l l be prof-
itable.) 1.2600 i

1,2590
The search for objectivity
The search
As traders
As traders continue
continue to to look
look for
for com-
com- 1.2580
puter-based algorithms that
puter-based algorithms that smooth,
smooth,
detrend, and differentiate the markets, 1.2570 I
there is still
there is still something
something to to be
be said
said for
for
using
using price
price charts
charts as
as long
long as
as you
you dodo 1.2560 1
so
so objectively.
objectively DeMarks
DeMark's work work isis inter-
inter-
esting
esting iin that iitt is
n that is chart-based,
chart-based, ana- ana- 1.2550
lyzes demand and
lyzes demand and supply
supply, and
and offers
offers
set procedures that
set procedures that involve
involve less
less sub-
sub- 1.2540 1
jectivity a and
jectivity n d mmakea k e b aback-testing
ck-testing 20-0:00 1 4 : 0 0 120-7:00 111 : 0 0 1 6/20/06 16:00 1 120-20:00
possible.
possible. !0 Source:
Source: QCharts
()Charts

Related
Related reading
Books: Demarking
"Demarking trend exhaustion This
This system is based on TD Carrie, a
The New Science of
The of Technical
Technical zones"
zones simple
simple pattern, described by Tom
Analysis by
by Lindsay Glass DeMark
DeMark in his book
book New
New Market
Market Timing
Timing
by Tom DeMark (John Wiley & Sons, (Active
(Active Trader, July 2002). Techniques.
Techniques. (This
(This article is also part
part of
of
1994).
1994). Learn
Learn how to use TD Sequential and the
the Basic Breakout
Breakout Trading
Trading Technique
Technique
TD Combo to identify trend-exhaustion article
article collection.)
DeMark on Day Trading Options zones.
by Tom DeMark and Thomas DeMark Tom DeMark
Tom DeM ark four-article setset
Jr. (McGraw-Hill, 1999).
Jr. (McGraw-Hill, 1999). Tom DeMark: Objectively
"Tom DeMark: Objectively speaking
speaking" This
This discounted collection includes four
includes four
by
by Mark Etzkorn
Mark Etzkorn articles
articles written by or
by or about Tom
Tom
(Active
(Active Trader, November 2001).
Trader, November 2001). DeMark
DeMark andand his
his trading
trading techniques:
Articles: An in-depth interview with Tom
techniques:
Countertrend
"Countertrend forexforex trading
trading with
with TD
TD DeMark. Absolute
"Absolute price projections
projections"
DeMark.
Sequential
Sequential" by
by Tom
Tom DeMark
DeMark and
and Rocke
Rocke DeMark
DeMark
Tom DeMark and Rocke DeMark (Active
(Active Trader,
Trader, July
July 2004).
2004).
Absolute
"Absolute price
price projections
projections"
(Currency
(Currency Trader, January 2005).
Trader, January 2005). by
by Tom DeMark and
Tom DeMark Rocke DeMark
and Rocke DeMark Tom
"Tom DeMark:
DeMark: Objectively
Objectively speaking
speaking"
Currencies have long been
Currencies have long been praised praised for
for (Active
(Active Trader, July 2004).
Trader, July 2004). by
by Mark
Mark Etzkorn
Etzkorn
their trend capacity, but in todays
their trend capacity, but in today's mar- mar- TD Absolute Retracement is a mechan- (Active
(Active Trader,
Trader, November
November 2001).
2001).
ket, an objective
ket, an objective countertrend
countertrend tech-tech- ical technique for
ical technique for calculating
calculating price
price DeMarking
"DeMarking trend
trend exhaustion
exhaustion zones
zones"
nique might be a forex traders
nique might be a forex trader's most most retracements
retracements and extensions that by
by Lindsay
Lindsay Glass
Glass
valuable asset. TD
valuable asset. TD Sequential
Sequential is is avoids
avoids the subjectivity and
the subjectivity and ambiguity
ambiguity of
of (Active
(Active Trader,
Trader, July
July 2002).
2002).
designed
designed to to identify
identify trend
trend exhaustion
exhaustion conventional technical approaches.
conventional technical approaches. Trading
"Trading System
System Lab:
Lab:
points and keep you one step
points and keep you one step ahead ahead ofof DeMark
DeMark variation
variation"
the trend-following crowd. Trading System Lab:
"Trading System Lab: by
the trend-following crowd. by Thomas
Thomas Stridsman
Stridsman
DeMark
DeMark variation
variation" (Active
(Active Trader,
Trader, September
September 2001).
2001).
by
by Thomas Stridsman
Thomas Stridsman
(Active
(Active Trader, September 2001).
Trader, September 2001).
You can purchase
You can purchase and
and download
download past
past articles
articles at
at www.activetradermag.com/purchase_articles.htm.
www.activetradermag.comipurchase_articles.htm.

28
28 S e p t e m b e September
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