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TD Lines are mechanically and objectively constructed. The trend lines drawn are TD Supply Lines and TD Demand Lines. Once the TD Lines are broken and qualified, the study automatically calculates a price projection. A qualified breakout appears as a solid line; whereas, a disqualified breakout is a dashed line.
TD Lines are drawn by connecting TD Points. A level one TD Point high is formed once a high is immediately preceded and succeeded by bars with lower highs. Thus, a level one high requires only three bars to make this determination. TD Point highs vary in "magnitude" based on the number of immediately preceding and succeeding bars that have lower highs. For example, level two has two bars preceding, two bars succeeding, and so on through level nine.
The converse of these principles governs TD Point lows.
Parameters
The TD Lines study identifies TD Points by drawing the level number above or below the high or low of the bar. This display can be suppressed.
A TD Lines trend line is drawn through two TD Points. A supply trend line is drawn between a TD Point high (Point "B") and the most recent prior TD Point low (point "A") that is strictly greater than point B. The line is then extended to the right of point B according to the rules below. Similarly, a demand trend line is drawn between a TD Point low (Point B) and the most recent prior TD Point low (point A) that is strictly less than point B; it may then extend to the right of point B. Notice that supply trend lines always slope down and demand trend lines always slope up. A given TD Point can be the right end of at most one TD Lines, but it can be the left end of several lines.
Ordinarily, TD Points of any level can determine TD Lines, but optionally TD Points of less than a specified level may be disregarded in drawing lines. Also, the number of times that a TD Point is used as the left end of a line can be limited; in that case, any additional lower high/higher low TD Points will be matched to earlier TD Points.
Optionally, a TD Lines can be declared "invalid" if the close of the bar just after point B breaks the line (is lower than the projected value of the line at that bar, for a demand line, or higher than the line, for a supply line). If this option is enabled, invalid lines are not drawn on the display.
Once created, a TD Lines is extended to the right until the line is canceled, a TD Line Breakout occurs, or the right edge of the chart is reached. The breakout case is further subdivided into qualified and disqualified breakouts. The user must choose whether the terminate a line when a disqualified breakout occurs, or to continue it to the right. If a line is terminated at a disqualified breakout. It is drawn dotted or not at all.
Grounds for cancellation of a TD Lines before TD Line Breakout are:
Breakout through an opposing TD Lines.
A breakout is penetration of market price through the TD Lines; that
is, high of a bar exceeds the calculated line value at that bar for a
supply line, or low of a bar is less than the line value for a demand
line. A
breakout is recognized only when the price exceeds the line value by at
least N ticks, for a breakout penetration parameter N. (If
price exceeds the line by less than this, there is not breakout, and the
TD Lines continues to be extended regardless of qualification conditions.)
A breakout is qualified if one or more these conditions are true:
For an upside (supply breakout, the close prior
to the breakout bar is a down close (strictly less than the close preceding
it). For
a downside breakout, the prior close is an up close (greater than the
preceding close).
For an upside (Supply) breakout, the open of the
breakout bar is above the TD Lines by at least N ticks (for a parameter-assignable
N), and is also above the prior close. For
a downside (demand) breakout, the open of the breakout bar is below the
TD Lines by at least N ticks, and is also below the prior close.
An upside (supply) breakout is qualified if the demand value is less than the TD Lines's value at the breakout bar by at least N ticks. The demand value is the close of the prior bar plus the difference between that close and the lesser of the low of that prior bar and the true low of the bar preceding it. A downside (demand) breakout is qualified if the supply value is greater than the TD Lines' value at the breakout bar by at least N ticks (for a parameter-assignable N). The supply value is the close of the prior bar plus the difference between that close and the larger of the high of that prior bar and the true high of the bar preceding it (note this difference will be negative).
If a qualified breakout occurs, the TD Lines is ended at that point, and a horizontal price-projection line is begun at the calculated predicted price. This line is then extended to the right until canceled or the right edge of the chart is reached.
Grounds for cancellation of a price projection line are:
Breakout through an opposing TD Lines.
Price penetrates the projection line.
The two conditions above are always checked.
Three additional cancellation rules can be applied using the bar after a breakout. These three rules can be individually enabled or disabled. The price projection line is canceled if:
For an upside breakout, the open of the bar after
the breakout bar is below the TD Lines' value at that bar. For
a downside breakout, the open of the bar after the breakout bar is above
the TD Lines' value.
For an upside breakout, the high of the bar after
the breakout bar is less than the breakout bar's close and the close of
the bar after the breakout bar is below the TD Lines' value at that bar.
For a downside
breakout, the low of the bar after the breakout bar is greater than the
breakout bar's close and the close of the bar after the breakout bar is
above the TD Lines' value at the bar.
For an upside breakout, the high of the bar after the breakout bar is less than the breakout bar's high. For a downside breakout, the low the bar after the breakout bar is greater than the breakout bar's low.
For further information on TD Lines, please refer to Thomas R. DeMark, The New Science of Technical Analysis, New York: John Wiley & Sons, 1994, Chapter 1.