TD REI indicator analysis and false signal filter TD POQ. Description, building principles, application conditions, and trading signals. Today’s learning block will focus on the study of the TD REI and TD POQ indicators, which are part of the TD Oscillators indicator group.
What is usually the main problem with oscillators?
The big problem that DeMark warns about using oscillators is that traditional traders tend to exaggerate the value of the indicator divergence with the price position. As a general rule, people who do not understand how an indicator works and based on which alternate principle, do not care what the composition and recommended interpretation of this indicator is. They try to interpret their vague signals that are not mainly signals and should also be confirmed by other indicators. An example very clear example of this is the famous indicator, RSI.
According to DeMark, the main problem when the interpretation of the signals is that traders do not usually realize the time that the indicator remains in the stages of oversold and overbought. DeMark points out that if the indicator is in the overbought or oversold zone for more than 6 candles, this indicates the strength of the trend, which means that this signal is false.
The number of sails can be different for other oscillators. Everything depends on the parameters of the indicator and the peculiarities of its composition. Therefore, in each particular case for each time period, one must perform a proper analysis of the number of bars in the oversold or overbought áreas.
To make the analysis of all parameters lighter, DeMark developed its own series of oscillators described below.
Introduction to the TD REI Indicator
The first DeMark indicator we will know is TD REI or Range Expansion Index (Range Expansion Index). This indicator is designed to filter false signals when the price is quoted in a strong trend, must confirm a signal only if the confidence of the market really changes. The TD REI gives us the total number of bars and, if the price is in the oversold – overbought by more than 6 bars, the indicator will show this and then indicate an important trend.
However, this indicator is more sensitive to price changes and, when the RSI is in the overbought area or remains in a neutral area, TD REI has already entered the oversold area some times, so a purchase signal is sent (in the chart above, all purchase signs on the indicator are marked with circles and with green flags on the price chart). It is logical that this indicator is much more complicated than it seems. Obviously, we can think it’s very peculiar, as I will describe later.
First, I would like to describe your mathematical model, so that you can understand the signals of the indicator…
TD REI Indicator Mathematical Model
The value of TD REI is calculated by adding the respective differences between the maximum of the current day and the maximum two days before and the minimum of the current day and the minimum two days before.
To simplify matters, the formula for the calculation would be as follows:
- X = (L – L2) + (H – H2), where
- H – current bar maximum
- H2 – maximum price two days before
- L – current bar minimum
- L2 – at least two bars
In addition, two conditions must be met:
the maximum of the current bar price must be greater than or equal to the minimum of five or six bars ago, or the maximum of two previous bars must be greater than or equal to the closing of seven or eight back bars.
the minimum of the current bar price must be less than or equal to the maximum of five or six bars behind, or the maximum of two previous bars must be greater than or equal to the closing of seven or eight back bars.
If no conditions are met, a zero value is assigned to the bar on that day.
If both conditions are met, we will have as a result a different formula:
TD REI = 100 x (Y / (H5 – L5 ))
Y = (Sum X1 … X5)
H5 – maximum on last 5 candles,
L5 – maximum on last 5 candles,
In other words, TD REI shows the price movement, adjusted to a quotation range during the last five candles.
TD REI Signal Filter
Like most indicators, TD REI is not a Grail and also sends false signals. To filter these false signals, Thomas DeMark suggests using the TD POQ (Price Oscillator Qualifier) price oscillator. To be fair, keep in mind that this indicator can be used together with an oscillator, depending on the action of the price (e.g., MACD, RSI).
TD POQ Conditions for TD REI
Sign of purchase:
-TD REI has been in oversold condition (below -40) for six or more sails.
-The last full sail should be closed below the previous bar.
-The current open sail must be equal to or less than the maximum of the previous two sails.
The market must always trade above the price that has been opened up and breaking the highest level in the last two bars.
Signal of sale:
-TD POQ has been in overbought condition (above +40) for six or more candles.
-The last full sail should be closed above the previous bar.
-The current open sail must be equal to or greater than the lows of the previous two sails.
-The market should be trading below the open price and breaking the lowest level in the last two bars.
To explain how TD POQ can be used to filter tickets, we will analyze the buying and selling signals.
Sign of purchase:
-That price has been in the oversold area for more than 6 sails.
-The last full sail was closed below the previous bar closure.
Now we see that the current candle opens lower than the maximum of the previous two candles (the current opening price of the candle is the same as the previous candle close)
When the price crosses the zone of the maxima of the last two candles, there is a buy sign.
I must point out that the TD REI is a good complementary tool for other Thomas DeMark indicators.
Now, let’s analyze the sales signal. As I said earlier, the indicator had been in the overbought area for more than 6 candles before the signal appeared. You can check the box.
The last candle was closed as a doji, the closing price is almost equal to the closing level of the previous candle. The market broke the minimum of the previous two sails and is trading downwards. Therefore, as there is no fully confirmed signal, it is important to use this indicator with other Thomas DeMark tools.
The combination of TD REI and TD POQ is a strong signal and it is not recommended to ignore it. The price is likely to pick up and continue its downward correction, according to the pessimistic scenario. After all, it does not suggest that the uptrend will necessarily end.