Understanding the Basics of DeMark Setups

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.

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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.

For more blogs on technical analysis, click here. You can also follow my technical charting here. Note there are many skilled technicians out there, so just following and learning are key. Good luck and keep working at it. It pays off… literally!!


Twitter:  @andrewnyquist and @seeitmarket     Facebook:  See It Market

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.