INTRADAY APPLICATION OF TD SEQUENTIAL

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INTRADAY APPLICATION OF TD SEQUENTIAL
Although Andrew Coles’ article in this issue, “TD Sequential And Ermanometry For Intraday Traders
,” discusses two different formulas, we decided to focus exclusively on Tom DeMark’s TD Sequential indicator. In addition to being originally intended for use with daily price bars, TD Sequential can also be used for backtesting. Ermanometry, on the other hand, uses a number of parameters that must be revised manually for each time period, and therefore cannot be backtested easily.
The issue that immediately arises with TD Sequential is that signals don’t come up very frequently. Running against the S%26P 500 stocks from 2000 to the present, TD Sequential produced only 369 trades in our tests. That’s less than one trade every 11 years, per stock. Furthermore, using the TD Sequential sell Setup as the exit, holding periods were nearly four years long. Such long holding periods helped create drawdowns exceeding 50%, which many traders would find unacceptable considering the system’s moderate gains.
As a test, we decided to see how effective TD Sequential would be using only the buy Setup, and relying on alternate indicators for the sell signal. Using the automated search in StrataSearch, we searched thousands of supporting trading rules and found some impressive results. Many indicator combinations had holding periods of one month or less, with percent profitability exceeding 70%. Annual returns were often over 40%, with drawdowns as low as 20%. In short, the TD Sequential indicator can produce some impressive results, but only when paired with the proper supporting indicators.
StrataSearch users can easily search for supporting indicators for the TD Sequential by downloading the plugin from the Shared Area of the StrataSearch user forum. After importing the plugin, simply launch the automated search to explore TD Sequential alongside thousands of supporting trading rules.
A sample chart is shown in Figure 7.
Figure 7: STRATASEARCH, TD SEQUENTIAL.
In this system, the buy signal is triggered by the TD Sequential buy Setup, but the sell signal is triggered by a price oscillator divergence.