Thomas DeMark's Approach - Part V - Sequential Mechanical Trading System
Sequential - Demark's mechanical trading system
Sequential is a mechanical trading system, developed by Thomas Demark. It consists of several stages:
- Setup building
- entry into the market
- closing the position
Any signal on this trading tactic begins with the formation of setup to buy or sell.
It is assumed that the setup to buy (sell) is formed, if for at least nine consecutive bars closing prices were lower (higher) than the closing price four bars before for each bar of the sequence.
In the setup there must be at least nine bars.
Intersection is the process of determining the truth of the setup.
For the setup to buy (sell) the intersection occurs when the high (low) price of the eighth or ninth bar will be higher (lower) or equal to the low (high) price of third, fourth, fifths, sixth or seventh bar.
If the intersection at the eighth or ninth bar did not happen, the next phase of the "countdown" is postponed until the moment when the intersection does take place. That is, one should wait for the next bar, at which the intersection of the corresponding bars happens.
Setup is canceled in two cases:
- Loop (discussed below);
- If one of the subsequent closing prices will be higher than the highest price in the buy setup or lower the lowest price in the sell setup.
Countdown and the opening position in the sequent - Demark's mechanical trading system
When the setup intersection is happened (but not before the ninth bar of the setup), begins the process of countdown.
For sell (buy) setups countdown reflects the ratio between the closing price and the high (low) price of two bars ago. The closing price must be higher (lower) than highest (lowest) price of two bars ago. As soon as the recorded 13 such prices (not necessarily consecutive), signal occurs.
Countdown phase cannot be completed earlier than 12 bars after the setup (it is assumed that the ninth bar also includes a phase reference), but usually there are 15 to 30 bars between the setup and countdown completion.
Countdown and the setup are cancelled in two cases:
Opposite direction setup has been formed
There is a "loop", i.e., a new setup in the same direction.
Entering the market (Entry)
There are three ways to open a position:
at the closing price of the bar, which completed the countdown. This is the most risky way, since a loop can happen.
after a "flip": in buy (sell) case, the closing price must be higher (lower) the closing price four bars ago;
after 2-bar "jump": in buy (sell) case, the closing price must be higher (lower) than the maximum (minimum) price two bars ago.
The third way is a compromise between the first and second
Sequential: closing the position
To determine the Stop Loss levels the author used the true price range of the day with the lowest minimum (highest maximum) for the entire period of setup and countdown formation for the buy (sell) signal.
There are two methods of exit by Stop Loss:
- The true range is calculated as follows: a bar's low price is subtracted from the bar's high price or from the closing price of the previous bar, if the latter is higher. In the case of a signal to buy (sell) Stop Loss level is determined by subtracting (adding) the obtained value from the low (high) price of the bar.
- More conservative is the second method. Bar for the calculation of Stop Loss is chosen the same way. However, when buying a Stop Loss level is determined by subtracting difference between the closing price and the low price from the low price, in sell case the Stop Loss is determined by adding difference between the high price and closing price to the high price.
Since the trader entering the market, expects to receive profit, it is important to determine the target profit levels in the case of a favorable price movement.
There are two ways to exit the market at a profit:
- a new setup formation is completed and price fails to reach the extreme price level recorded during the formation of the nearest non-active setup
- There is a trend reverse signal
Sequential is successfully used not only on the daily charts, but the author is advised to apply it only at this time interval.
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