First of all, Thomas Demark suggested that trend lines should be formed from right to left because the current price movement is much more important than the previous one. Thus the latest market data in the right side of the chart .
TD-points are points through which the trend line will be drawn. The trend lines are called TD-Lines.
Supply price pivot point is the bar whose top is higher than those of both the top of the previous and following bars. Bearish trend lines are drawn through the bars highs.
Bars with bottoms lower than those of both the previous and following bars are called demand price pivot points. Bullish trend lines are drawn through the bottoms of such bars.
To draw a trend line from right to left two consecutive TD-points should be found and a trend line should be drawn through them:
An example of how to form a TD-line
- The demand price pivot point is lower than the close two bars before it.
- The supply price pivot point is higher than the close two bars before it.
- For the demand price pivot point, the next bar close is higher than the TD-Line rate of advance.
- For the supply price pivot point, the next bar close is lower than the TD-Line rate of recede.
Highs and Lows found without the aforementioned criteria are called Chart Highs and Lows. Highs and Lows found by these criteria are called True Highs and Lows.
TD-LINES OF A HIGHER MAGNITUDE
The TD-lines described above are TD-lines of Level 1 magnitude, i.e to define each TD-point three bars are needed.First level TD-lines are short-term. To analyze a long-term perspective of price behavior TD-Lines of Level 2, 3 etc. magnitude are used.
TD-Lines of Level 2 magnitude are drawn through TD-Points using 5 bars: the supply price pivot point should be surrounded from each side by two lower bottoms and the demand price pivot point should be surrounded from each side by two higher tops.
So, to form a Level 3 magnitude TD-line , each TD-Point requires 7 bars and so on.
All TD-points of a higher magnitude level are also TD-points of a lower magnitude level, but not all of them are active points of the first level, as only the two last TD-points of the lower level are active.
TD-Lines of a higher magnitude level have the same logic as TD-lines of the first level, but Thomas Demark recommended to use only Level 1 TD-lines because:
- TD-lines of a higher magnitude have a greater probability of breaking the trend line before the last TD-point is formed, and so a good opportunity is lost;
- TD-lines of a higher magnitude have a greater probability of enabling the opposite signal (from TD-line of a lower level) before the price target is achieved.
