TD Sequential | Trading Strategy (Setup & Countdown)

I. Trading Strategy

Developer: Thomas DeMark: TD Sequential. Concept: Trend reversal using exhaustion points. Source: (i) DeMark, T. R. (1994). The New Science of Technical Analysis. New Jersey: John Wiley & Sons, Inc.; (ii) Kaufman, P. J. (2005). New Trading Systems and Methods. New Jersey: John Wiley & Sons, Inc. Research Goal: Performance verification of the TD Sequential™ pattern (TD Sequential™ is a trademark of Market Studies, LLC). Specification: Table 1. Results: Figure 1-2. Trade Setup: There are tree stages explained in the Table 1 (Setup, Intersection, and Countdown) . Trade Entry: There are three entry methods explained in the Table 1. We apply the 2nd method. Long Trades: Enter on the close if Close[i] > Close[i − 4]; Short Trades: Enter on the close if Close[i] < Close[i − 4]. Index: i ~ Current Bar. Trade Exit: Table 1. Portfolio: 42 futures markets from four major market sectors (commodities, currencies, interest rates, and equity indexes). Data: 33 years since 1980. Testing Platform: MATLAB®.

II. Sensitivity Test

All 3-D charts are followed by 2-D contour charts for Profit Factor, Sharpe Ratio, Ulcer Performance Index, CAGR, Maximum Drawdown, Percent Profitable Trades, and Avg. Win / Avg. Loss Ratio. The final picture shows sensitivity of Equity Curve.

Tested Variables: Setup_Length & Countdown_Length (Definitions: Table 1):

Figure 1 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $0).

STRATEGY	SPECIFICATION	PARAMETERS
Auxiliary Variables:	N/A
Pattern:	Source: (i) DeMark, T. R. (1994). The New Science of Technical Analysis. New Jersey: John Wiley & Sons, Inc.; (ii) Kaufman, P. J. (2005). New Trading Systems and Methods. New Jersey: John Wiley & Sons, Inc. TD Sequential: Setup Long Trades: At least 9 consecutive closes are lower than the corresponding closes 4 trading days earlier (Close[i] < Close[i − 4]; Index: i ~ Current Bar). In the case where today’s close is equal or greater than the close 4 trading days before, the setup must begin again. Short Trades: At least 9 consecutive closes are higher than the corresponding closes 4 trading days earlier (Close[i] > Close[i − 4]; Index: i ~ Current Bar). In the case where today’s close is equal or smaller than the close 4 trading days before, the setup must begin again. Note: Each day in a look back period is a trading day. TD Sequential: Intersection Long Trades: The high of any day on or after the 8th day of the setup is greater than or equal to the low of any day 3 or more days earlier. This rule assures that prices are declining in an orderly fashion. Short Trades: The low of any day on or after the 8th day of the setup is lower than or equal to the high of any day 3 or more days earlier. This rule assures that prices are advancing in an orderly fashion. TD Sequential: Countdown Long Trades: Once the setup and intersection are satisfied, we count the number of days in which the close is lower than the low 2 days earlier (Close[i] < Low[i − 2]; Index: i ~ Current Bar). The days that satisfy this requirement do not need to be in a row. When the countdown reaches 13, the countdown is completed and we get a buy signal unless one of the following conditions occurs: (a) A new setup is formed simultaneously as the countdown process is taking place; (b) There is a close that exceeds the highest intraday high that occurred during the setup stage. Short Trades: Once the setup and intersection are satisfied, we count the number of days in which the close is higher than the high 2 days earlier (Close[i] > High[i − 2]; Index: i ~ Current Bar). The days that satisfy this requirement do not need to be in a row. When the countdown reaches 13, the countdown is completed and we get a sell signal unless one of the following conditions occurs: (a) A new setup is formed simultaneously as the countdown process is taking place; (b) There is a close that exceeds the lowest intraday low that occurred during the setup stage.	Default Values: Setup_Length = 9; Setup_LookBack = 4; Intersection_LookBack = 3; Countdown_Length = 13; Countdown_LookBack = 2; Sensitivity Test: Setup_Length = [5, 25], Step = 1; Countdown_Length = [5, 25], Step = 1;
Filter:	N/A
Entry:	There are three methods of entry: (a) Enter on the close of the day on which the countdown is completed; (b) Long Trades: Enter on the close if Close[i] > Close[i − 4]; Short Trades: Enter on the close if Close[i] < Close[i − 4]; (c) Long Trades: Enter on the close if Close[i] > High[i − 2]; Short Trades: Enter on the close if Close[i] < Low[i − 2]. Index: i ~ Current Bar. In this test we apply the 2nd method.
Exit:	Pattern Exit: The current position is liquidated once the new setup is complete and price fails to exceed the furthest price recorded by the recent inactive setup. Stop Loss Exit: Long Trades: The difference between the close at the entry bar and the low of the lowest day of the pattern is subtracted from the low of the lowest day. Short Trades: The difference between the high of the highest day of the pattern and the close at the entry bar is added to the high of the highest day. Note: In order to activate a stop loss, the close must exceed the calculated levels.
Sensitivity Test:	Setup_Length = [5, 25], Step = 1 Countdown_Length = [5, 25], Step = 1
Position Sizing:	Initial_Capital = $1,000,000 Fixed_Fractional = 1% Portfolio = 42 US Futures ATR_Stop = 6 (ATR ~ Average True Range) ATR_Length = 20
Data:	42 futures markets; 33 years (1980/01/01−2013/05/31)

Table 1 | Specification: Trading Strategy.

III. Sensitivity Test with Commission & Slippage

Tested Variables: Setup_Length & Countdown_Length (Definitions: Table 1):

Figure 2 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $100 Round Turn).

Related Entries: TD Sequential (Countdown & Exit) | TD Setup – Trend (Setup & Exit) | TD Sequential – Adjusted (Countdown & Exit)
Related Topics: (Public) Trading Strategies

CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

RISK DISCLOSURE: U.S. GOVERNMENT REQUIRED DISCLAIMER | CFTC RULE 4.41

Codes: matlab/demark/sequential-1/