Understanding the Basics of DeMark Setups

Andrew Nyquist

I receive many questions about DeMark setups as they arise from time to time in my technical charts. As I’ve stated before, I really like DeMark analysis and indicators (developed by Tom DeMark of Market Studies) but I am hardly an expert, as there are plenty of DeMark indicators that I have yet to use. Note DeMark indicators are rooted in trend analysis and exhaustion and can get quite complex.

Folks like Kevin Depew (@kevindepew), editor of Bloomberg’s Economics Brief, and Twitter follows like @_peritas, @TommyThornton, @Makro_TraderRR trades, and @trdraaron (to name a few) are common users of DeMark analysis (note mentions here are not endorsements). Another reference is Jason Perl’s book “DeMark Indicators.”

In short the basic DeMark setup consists of the following:

  • A series of nine consecutive bars that close higher or lower than the close 4 bars earlier. (Bars are “period” candlesticks — periods can be minute, hourly, daily, weekly, monthly, etc…).
  • 9 consecutive closes “higher” than the close 4 bars prior records a “sell setup” and 9 consecutive closes “lower” than the close 4 bars prior records a “buy setup.”
  • A “sell setup” is “perfected” when the the high of bars 6 and 7 in the count are exceeded by the high of bars 8 or 9 and a “buy setup” is likewise “perfected” when the low of bars 6 and 7 in the count are exceeded by the low of bars 8 or 9. A “perfected” setup tends to be a better indicator, as unperfected setups often are perfected at a later date.
  • After a setup records, a reaction in opposite direction has a higher probability during the next 1-4 bars.
  • Note that a setup does not guarantee a reaction in the opposite direction… for instance, if momentum is too strong in the trend direction, a reaction may be muted. A sideways move or continuation of the trend following a setup indicates a weaker setup.  This is why it is good to employ strong risk management when trading setups (i.e. stops).

Lastly, it’s good to know that setups often often occur within a “trend” and either offer a brief counter-trend trade or an opportunity to get in on the trend.

Again, this is just a basic summary of a DeMark setup. For more effective use, be sure to combine other your full arsenal of technical indicators/analysis. Or, better yet, read up and learn more about DeMark analysis.

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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.