TD D-Wave indicator by Thomas DeMark. Principles of construction. Requirements and rules of application.

Dear friends,

I continue studying Tom DeMark’s tools, and, today, I’d like to deal with the TD D-Wave indicator. Remember, in one of my earlier articles, I already described such tools as TD Sequential indicator and its analogue TD Combo. TD D-Wave is a supplementary tool for the famous Elliot Wave Theory. Tom DeMark applies the analytical basis of the tools, previously described, to the Elliot Waves.

Remember, Elliot theory is based on the division of the price movement into 5 main trend waves and 3 corrective ones,. It is rather hard to identify the beginning and the end of each wave, especially in such a volatile market as the cryptocurrency market. By means of TD D-Wave, you can find the answer to the question, all traders are interested in, about where the price is going and when it will reach the destination (it is about the trend direction and the time of the trend reversal).

Tom DeMark offers the solution to the challenge. He developed the rules that will help you objectively interpret Elliot Waves.

Basic principle of Elliot Waves

The description of TD D-Wave won’t be complete without a brief review of Elliot Wave theory. Well, let’s see the main wave principle and then, we shall see how DeMark has changed it to eliminate the subjective factors that may confuse us.

As in case with TD Sequential, Elliot Wave theory and TD D-Wave have an obvious advantage that you can apply them to any market or timeframe, irrespective of the basic volatility of the instrument analyzed; and you don’t need to change any default settings of the indicator. With a correct application, both Elliot Waves and TD D-Wave can provide a kind of “road map” of the market direction, which you can use to identify the price targets and determine the points of the potential trend exhaustion.

The most difficult moment in employing Elliot Waves is identifying the final wave. It is sometime impossible to find out if the market is in wave 3 or in wave C or if it is wave 5 broadening.

Algorithm of Elliot Waves – DeMark’s Waves

DeMark solved this problem by introducing a number of requirements to be met, so that you can determine each TD D-wave; he developed a computer version of Elliot Waves. DeMark's time rules define the least criteria, necessary to complete each wave and start the next one.

TD D-Wave Requirements of Wave 1 in the bullish (rising) market

  1. The origin of the TD D Wave up Sequence is defined once the market records 21 bar low close. The close is less than all twenty prior closes
  2. Once condition one is satisfied, the market must post a thirteen bar high close. A close that is higher than all twelve prior closes. This confirms the origin of the TD D-Wav sequence and establishes that the market is in Wave 1.
  3. Wave 1 isn’t complete until the market records an eight bar low close (a  close less than all seven prior closes), which confirms that Wave 2 has been formed.

TD D-Wave Requirements of Wave 2

  1. The first requirement for wave 2 is the last requirement of Wave 1, that is, that the market records an eight bar low close (a close less than all seven prior closes)
  2. Wave 2 continues until the market records a twenty one bar high close. A close that is higher than all twenty previous closes, reinforcing the notion that wave 3 is underway.

TD D-Wave Requirements of Wave 3

  1. The first requirement for wave 3 is the last requirement of wave 2, that is, Wave 2 continues until the market records a twenty one bar high close.
  2. This remains the case until we see a 13 bar low close (a close less than all 12 prior closes), which means that Wave 3 is complete, and Wave 4 is developing.

TD D-Wave Requirements of Wave 4

  1. The first requirement of Wave 4 is the last requirement of wave 3, that is, there must be a 13 bar low close (a close less than all 12 prior closes), which signals that Wave 3 is complete, and Wave 4 is developing.
  2. Wave 4 is considered complete when the market subsequently posts a 34 bar high close(a close higher than all 12 prior closes), representing the onset of Wave 5.

TD D-Wave Requirements of Wave 5

  1. The first requirement of wave 5 is the last requirement of wave 4, that is the market subsequently posts a 34 bar high close(a close higher than all 12 prior closes). It signals that Wave 4 is complete and Wave is going on.
  2. Wave 5 is considered complete when the market subsequently posts a 13 bar low close for Wave A (a close lower than all 12 prior closes), representing the origin of Wave A.

TD D-Wave Requirements of Wave A

  1. The first requirement for wave A is the last of wave 5, that is the market subsequently posts a 13 bar low close for Wave A (a close lower than all 12 prior closes), representing the origin of Wave A.
  2. Wave A is considered complete when the market subsequently posts an 8 bar high close for Wave B (a close higher than all 7 prior closes), representing the start of Wave B

TD D-Wave Requirements of Wave B

  1. The first requirement for Wave B is the last of wave A, that is, an eight bar high close for Wave B (a close higher than all 7 prior closes), representing the start of Wave B
  2. Wave B is considered complete when the market subsequently posts a 21 bar low close – the low for Wave C (a close lower than all 20 previous closes), representing the onset of Wave C.

TD D-Wave Requirements of Wave C

  1. The first requirement for Wave C is the last of Wave B, that is, a 21 bar low close for Wave B (a close lower than all 20 prior closes), representing the onset of Wave C.
  2. Wave C is complete when the market closes below the low close of TD Wave A

Additional rules to apply the TD D-Wave indicator to the bullish trend:

  1. Peak of Wave 3 must be higher than the peak close of Wave 1, and Wave 5 must be above the peak close of Wave 3
  2. If a pullback from Wave 1 is so short that the decline fails to satisfy the condition necessary to initiate Wave 2 and the market subsequently recovers above what had been Wave 1 high close, then Wave 1 will shift over the right in line with the new high close. 
  3. If the pullback from Wave 3 is so short that the decline fails to satisfy the conditions necessary to initiate Wave 4 and the market subsequently recovers above what had been the Wave 3 high close, then Wave 3 will shift to the right, according to the new high.
  4. If the pullback from Wave 5 is so short that the decline fails to satisfy the conditions necessary to initiate Wave A and the market subsequently recovers above what had been the Wave 5 high close, then Wave 5 will shift to the right, according to the new high.
  5. Wave 5 will only be complete after Wave C crosses the closing low of Wave. Until that happens, if what had been Wave B closes above the high of Wave 5, then Waves A and B will be erased and Wave 5 will shift to the right.
  6. If Wave 2 closes below the low of Wave 1, then Wave 1 will disappear and the count will begin anew.(it is the same if the low close of Wave 4 closes below the low close of Wave 2, then Wave 2 will shift to where Wave 4 otherwise would have been  
  7. Once Wave C crosses the low close of Wave A, Wave 5 is locked into place and cannot move. (Consequently, if the market subsequently closes back above the high close of Wave 5, rather than erasing waves A, B, and C, and move Wave 5 to the right, the indicator will instead label the move to new highs as a fresh Wave 1 advance rather than erasing the previous Wave 5)

Just like in case with TD Sequential, TD D-Wave can be used only provided the market is trending. When the price is moving sideways, TD D-Wave can’t be applied.

How to use TD D-Wave for cryptocurrency trading?

Cryptocurrency traders can use TD D-Wave indicator to identify and forecast waves 3 and 5, as well as the completion of waves 2, 4 and C.

Forecast for the market price in bullish market

Wave 1: expect the advance of Wave 1.

Wave 2: In perfection, the pullback of Wave 2 should be 61.8% of the distance, covered between the low close of Wave 1 and the high close of Wave 2.

Wave 3: you figure out Wave 3 in the following way:

  1. Count the difference between the low close and the high close of Wave 1.
  2. Multiply this value by the coefficient 1,618, and then
  3. Add this result to the lower close of Wave 1.

Wave 4:

  1. If Wave 2 was shallow, that is, about 38.2% of Wave 1 length, the expected recovery of Wave 4 would have been 61.8% of the distance, covered between the low close and the high close of Wave 3, but
  2. If Wave 2 was deep, that is, about 61.8% of Wave 1, the expected recovery of Wave 4 would have been 38.2% of the distance, covered between the low close and the high close of Wave 3.

Wave 5:

  1. Find out the difference between the low close and the high close of Wave 3
  2. Multiply it by the 1.618 coefficient
  3. Add this value to the low close of Wave 3

Wave C:

  1. Find out the difference between the high close of Wave A and the low close of Wave A
  2. Multiply it by the 1.618 coefficient
  3. Subtract the value from the high close of Wave A

Identifying final targets for Waves 5 and C

Tom DeMark originally developed the rules of TD D-Wave trading system to identify the fianl targets for Waves 5 and C.

Upside target for Wave 5, according to TD D-Wave

  1. Find out the difference between the high and the low of Wave 1
  2. Multiply the value by 1.382
  3. Add the result to the low of Wave 2 (if Wave 3 exceeds this level, then, you should apply the coefficient 2.764, instead of the original value of 1.382).

Downside target for Wave С according to TD D-Wave:

  1. Find out the difference between the High and the low of TD D-Wave A
  2. Subtract the result from the high of TD D-Wave A, and then
  3. Multiply this value by 1.618

Price forecast in the bearish market

To identify pivot points in the bearish market, you need to take the points, opposite to those, described in the case with bullish market.

To know for sure which trend (upward or downward/ bearish or bullish) the price is trading, you need a complementary tool. Welles Wilder’s Relative Strength Index (IRS) suits the best. You appoint the RSI overbought and oversold zones at 40 and 60. If the market is moving as a part of an upward bullish TD D-Wave sequence, then RSI must stay above 40 during the corrective waves 2 and 4. If the market is declining with a bearish descending TD D-Wave sequence, then RSI must stay below 60 during the corrective waves 2 and 4

How to trade with TD D-Wave?

  • You enter a trade at the breakout of Wave 1 extreme. The breakout signals the onset of Wave 3.
  • You don’t trade or employ the short-term scalping strategy at the time of Wave 4
  • You enter a trade in the direction of the prevailing trend, when the price goes through the extreme of Wave 3, when the market is within Wave 5
  • You enter a trade against the trend at the end of Waves 5 and B

TD D-Wave will send more accurate signals if you combine it with other DeMark's indicators, like TD Sequential or TD Combo. While TD D-Wave helps you identify the stage of the trend, TD Sequential and TD Combo indicate the potential levels of the trend exhaustion. This application of indicators is more efficient than just expecting the extremes’ breakouts of waves 1 and 3 to start trading with the trend. If the peak of one of the waves matches to the complete count of TD, the signal of TD Combo count, or the situation when the market finishes the TD construction to the level of TDST, it is often a good opportunity for a winning trade. In fact, the right moment to enter a trade, when any of these signals matches with the satisfaction of the requirements of TD Wave 2 or TD Wave B. If you manage to identify the onset of Wave 3 or the origin of Wave C, you will have an obvious advantage over other traders.

I recommend the following bar sequence for TD D-Wave: 21-13-8-21-13-34-13-8-21.

Remember that if you want to see the TD D-Wave values of senior or junior orders, you simply apply the analysis to a longer or a shorter timeframe. The analysis of longer periods of time is especially useful because it allows you to determine whether the price movement is an impulse or a corrective wave relative to the entire price movement. So, if the market is in Wave 3, then a more impulsive move should be expected.

From a long-term trading point of view, it is also useful to know on a daily, weekly, and monthly basis when the market is in Wave 5, as this information gives really important information about a broader trend outlook and the correct positioning for more profitable opportunities of the trend-based trading in terms of risk management.

In the next post, I’ll go on describing the indicators by Thomas DeMark

Subscribe not to miss the continuation!

Here, I am about to finish another part of my training block, devoted to describing Thomas DeMark’s tools, applied to the BTCUSD pair. I do really hope that this material is helpful and interesting for you!

I wish you good luck and good profits!

 


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TD D-Wave by Thomas DeMark

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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