Tutorial - TD- Waves explained

Markets move in waves. 5 waves in one direction and then 3 waves in the opposite direction on any timeframe and in both up and down sequences. The correction is called an ABC sequence and if correctly identified, the market then moves into a new 5 wave up sequence. This has long been established though Elliot wave theory (EW).

DeMark waves (TD-waves) differs from EW as they use set mechanic rules for the waves. This sometimes leads to us seeing markets in a different stage than EW commentators. TD-waves also stays silent in non-trending markets which is the most common stage. For more information and explanation about Elliot waves click here

The rules regarding TD Waves are as follows:

First TD-waves only considers the closes rather then high and lows. This means highs and lows can eclipes the extremes of the prior waves (not allowed in EW but making it a better tool).

To identify a wave (for an uptrend):

  1. Wait for the market to Close above all 21 previous Closes. Then wave 1 up is locked in.
  2. When wave A is in, wait for the market to close below all 8 previous closes (rolling) to lock in wave 2 low. This is often the most important spot to act on as most are fooled here and expect the markets to return to the previous downtrend.
  3. Instead the markets moves to a close higher than all 21 previous triggering wave 3 up. The third wave is the most important to catch as it is supposed to be impulsive- that is to move without overlapping.
  4. The market remains in wave 3 until a close below all 13 previous closes. With that, wave 3 is over and wave 4 has begun. This is often the trickiest phase with overlaps and false starts.
  5. Following wave 4 low the market then moves higher and closes above all 34 previous closes, often a new high, and wave 5 triggers. From here on, stops must be used as it could end at any time.
  6. Wave 5 ends when a close below the previous 13 closes closes to record the A-wave low, the first leg of a correction lower.
  7. Wave B records when there is a close above all previous 8 closes. This wave B high Wave 2 as Wave C like wave 3 should be impulsive. Wave C also has to be below wave A so the minimum move lower is known. With a new low close below wave A close , the C-wave is locked in and the new count can begin.

Important to note, unlike EW, the DeMark TD-waves can shift back to the previous count. This is important as one can not view the waves subjective. For example, the wave A and B is in but the market moves back to a new high and such moves back into wave 5 up.  

When the C-wave low is in, it is very important to figure out what market structure it is in, as it could turn into Wave 3 down and is therefor important to catch. In that case, a bounce is only wave 4 high and will be followed by a wave 5 down.

Wave length projections

The rules for determing the different projections for the lengths of the waves are as follows:

Wave projections are derived from fibbonacchi numbers 0.618 and 0.38 where 

  • After the wave 1 concludes
  • Wave 2 is either 38% or 61% of the length of Wave 1
  • Wave 3 is 1.618 of Wave 1 Added to Wave 1 low Close
  • Wave 4 is 38% or 61% of Wave 3 and if Wave 2 is deep, 61.8% than Wave 4 should be shallow 38%.
  • Wave 5 is 1.618 of wave 3 added to the low of wave 3.
  • A projection for Wave 5 from the Wave 1 is also done where wave 5 is projected to be Wave 1 * 1.382 from the Wave 2 low.
  • If wave 3 is long and goes beyond its projection then Wave5 is expected to move 2.23 times the wave 1.

Disclaimer: Futures, Options, and Currency, CDF or any other structured products trading all have large potential rewards, but also large potential risk. They are not suitable and may be appropriate only for sophisticated investors. Investors should never invest or trade with money they can not afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, options, currencies or any other instrument or participate in any trading strategy but for purely informative reasons. Presented material should not be considered or regarded by recipients as substitute for own research, judgement or actions. No representation is being made that any account will or is likely to achieve profits or losses. Indeed, events can materialize rapidly and thus past performance of any trading system or methodology is not necessarily indicative of future results particularly. Any simulated or hypothetical performance results have certain inherent limitations. While prices may appear within a given trading range, there is no guarantee that there will be enough liquidity/ volume to ensure that such trades could be actually executed. Hypothetical results thus can differ greatly from actual performance records, and do not represent actual trading since such trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight and back testing. Such representations in theory could be altered by Wars, Sovereign Debt Defaults or Force Majeure events . It should not be assumed that the methods, techniques, or indicators presented in this publication will be profitable or that they will not result in losses since this cannot be a full representation of all considerations and the evolution of economic and market development. Past results of any individual or trading strategy published are not indicative of future returns since all things cannot be considered for discussion purposes. In addition, Northern Raven’s analysis is provided for informational and educational purposes only and should not be construed as investment advice or a solicitation for money to manage since money management is not conducted. Therefore, by no means is this publication to be construed as a solicitation of any order to buy or sell any security or asset. As such, this information should not be relied on solely in making any investment. Prior to entering into a transaction you should consult with your own legal, regulatory, tax, financial and accounting advisers to the extent you deem necessary to make your own investment, hedging and trading decisions.