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Perfect Timing – In Conversation with Tom DeMark

There aren’t many people that I have encountered in my life that I consider to be a legend. My Dad obviously, not least for having the foresight to take his youngest son to Highbury in March 1976 to witness Arsenal thrash West Ham 6-1. Great timing, Ron. 35 years and 29 season tickets later, I am repeating the same trick with my own son Charlie.

My first footballing legend was a winger call George or ‘Geordie’ Armstrong, who scored in that game. One night, aged 7, I received a call from ‘Geordie’ telling me he was really pleased with my support and that I was one of Arsenal’s best fans. I think it was my uncle putting a voice on, but hey, not many kids get to speak to a hero of theirs so I didn’t complain.

 

In the financial arena, legends are few and far between for me. I can’t help but to side with Nicolas Taleb rather than Jack Schwager when it comes to putting those far, far more successful than me, en masse, on a pedestal. One person who would make the list though is another master in the art of timing, Tom DeMark, a person who has influenced my perception of markets and subsequently my career ever since he replied to a Bloomberg message of mine at 2 am Arizona time one day in 1999.  Luckily for me, this week, he agreed to be interviewed by me for The Forex Journal. While I add the word ‘Tom’ next to ‘Dad’ and ‘Geordie’ on my ‘Legends I have spoken to on the phone’ list, you can read a transcript of our conversation below.

Paul Day – Tom, it’s a pleasure to speak to you.  As a brief background, can you recall how you found your way into the financial markets and what prompted you to begin devising your own indicators?

Tom DeMark – I always had a passive interest in markets while in high school and college, however while in law school and grad school of business I had part time jobs that focused on markets and trading.  Also, my relatives were active in the markets during the late 1960's when the bull market was in the media all the time. Fortunately, after graduating with my MBA I had the choice of many job opportunities and selected the one with the most upside potential. I grew with that company and was able to meet many influential people who guided my career. 

Paul Day – Back when you were doing your initial research, desktop PCs and spreadsheets were a bit of a pipe dream.  I guess the idea of using price action to forecast future market moves was also deemed as highly unusual.  Did that make people skeptical about your findings?

Tom DeMark – When I started my research, there were no computers or even calculators. All analysis was performed manually. Then in the mid 1970s, the Bowmar calculator and the Texas instruments TI 57 became available in marketplace. I was able to graduate to these ‘high tech’ tools and abandon my proportional divider and slide rule. 

At the time, there were only moving averages and trend lines being applied to market analysis along with various sentiment indicators such as specialist short sales and odd lot short sales etc. There really was a dearth of information.  However, I had the luxury of being with the fastest growing investment company in the country and there was only a small group of us.  I was given a license to explore all patterns pertaining to market timing that I could imagine. I was also given a $15 million budget at the time which enabled me to travel to meet and discuss trading approaches with institutional as well as retail traders. I can honestly, truly say that no one had the opportunities I possessed and it is unlikely anyone will ever now enjoy the same access I had.  Unfortunately for me at the time, there was no research upon which I could build but, at the same time, I possessed the time and money to follow my own imagination and ideas. 

Paul Day – Much of your work is littered with the Fibonacci number sequence. Was that by design? 

Tom DeMark – Yes, Fibonacci had a lasting influence upon me.  I was the first to retrieve “Nature’s Law,” R.N.  Elliott’s 1946 Financial World Magazine treatise, from the New York Library archives, back in early 1970s.  No one had previously even heard of Elliott or Fibonacci and certainly no one had publicly applied the theories to markets. 

The Bank Credit Analysts did mention it in one of their monthly publications and also mentioned Hamilton Bolton who was an assistant to Elliott.  I tried to contact Bolton but he had passed away.  I did meet with Jack Frost a traveling Tax judge in Canada, who was an Elliott expert and did subsequently write the preface for Bob Prechter’s Elliott book in 1977. 

I have seen a few people such as Prechter make phenomenal calls applying Elliott theory but the majority of Elliott aficionados are ‘after the fact, rear view’ experts who merely report what the market has done not what it will do. That is why I developed TD D-Wave which incorporates my mechanical application of Fibonacci waves. 

By the way, Elliott did mention the golden mean .618 that is dominant in nature and I was the first to apply the 38.2% reciprocal, which is a mainstay of retracement users. 

Paul Day – Fibonacci retracements are indeed a weapon in many technical analysts armory, but you are not a fan of the Technical Analyst moniker are you?  What is the idea behind terming yourself as a Market Timer?  Does that suggest your indicators are therefore applicable to those who work from a primarily fundamental framework? 

Tom DeMark – As I mentioned previously, I was fortunate in my career as I elected to follow the path of institutional investment rather than retail trading.  The President of the small company where I began my career was one of the founders of the CFA Program (The Chartered Financial Analyst certification).  I could have been grandfathered with the designation but instead chose to take the exams. 

While I passed the first two years exams and earned 'C' and 'F'; designations I never completed the program to receive the 'A' and receive my CFA as I never considered myself a true ‘fundamentalist.’  Though I believe fundamentals determine the direction of the markets, I look at market timing as critical to identify those inflection levels where it is the most efficient window to make structural changes in core positions. There is also the MTA (Market Technicians Association) designation and I was one of their first members from outside the New York area. However, after many years of membership I withdrew as I do not see myself as a technician either. I view myself as a hybrid or as I like to refer to it (and have coined the phrase) ‘market timer.’ 

Paul Day – That seems to fit well with some of the big players in the market I guess. On a slightly different topic, as you know, I have used your indicators for many years to make predictions on the markets, with a fair degree of success.  On September 14th this year, I highlighted the elevated chances of Bank of Japan intervention after a weekly downside exhaustion target using TD Propulsion was hit at 82.94.  The next day the Bank of Japan aggressively intervened in currency markets for the first time in 6 years. 

This has led some people to suggest that the Bank of Japan apply TD indicators to their charts.  Obviously, you cannot discuss individual examples, but do you have reason to believe your long-term charts are consulted by policy makers?  And if not, do you feel they would benefit from doing so? 

Tom DeMark – Currently, there are in excess of 50,000 users of the indicators on the Bloomberg Financial Service alone.  In addition, there are many others who access other platforms.  We know that many central banks as well as the Federal Reserve monitor the indicators.  We believe what makes the indicators particularly appealing is that they are unlike conventional timing tools that are predominantly ‘trend following’ and are designed to anticipate likely trend reversals.  This allows large funds to buy into market weakness and to sell into market strength.  It is easier to buy when everyone is selling and, vice versa, sell when everyone is buying as one is trading against the prevailing trend and the chance of bad fills or price slippage is very low, however if one acts in the direction of the trend, one risks missing out on good market fills. 

Paul Day – Many people look at your work and think only of TD Combo and TD Sequential but, as I am aware, it is so much more than that.  Would you say you have now created your own interpretation of everything you feel has merit as regards market timing? 

Tom DeMark – My goal 40 years ago was to develop tools that anticipated both market tops and bottoms.  I have also developed shorter term methods to confirm that trend exhaustion has been completed and that the trend has in fact been reversed.  In total there are close to 70 market timing indicators included in the DeMark indicator packages available on Bloomberg, Thomson Reuters and CQG.  One thing that has always amazed us is that, with the multitude of seemingly disparate methodologies upon which the TD indicators are based, they do not contradict one another.  On the contrary, they seem to complement one another seamlessly and dovetail into one another.  There is complete harmony. 

Paul Day – If that is the case, for those day traders looking to start employing TD indicators, do you feel you have a TD equivalent of many existing trading strategies that they could easily adopt?  Moving average crossover strategies or an equivalent for MACD for example. 

Tom DeMark – The goal has always been to enhance upon conventional approaches to market analysis and that includes conventional approaches such as moving averages and trend lines etc. However, one thing we have done that others have been unable to do is to make the approach totally mechanical and objective. No subjectivity is allowed even with something as simple as connecting points to construct a trend line. 

Paul Day – One indicator I have grown increasingly dependant on is TD Propulsion. This has many similarities to the now popular swing trading methodology.  Is it true you devised this many years ago? 

Tom DeMark – Correct.  I developed TD Propulsion over 35 years ago.  It is a method whereby prior thrusts are identified as repeatable once they have exceeded a key threshold as defined by the prior thrusts in that same direction.  At the time, no one was ‘swing trading’ as you refer to this type of analysis. But even today many swing traders are subjective in their approach whereas I have made this type of analysis totally objective and mechanical. 

Paul Day – Though your work has been primarily directed towards the professional end of the market, there is huge interest in your indicators from the growing retail sector.  Many of the people I presented to or met during my time in the retail Forex space were keen to employ TD studies in their trading but, save for an exorbitant long-term contract with Bloomberg or one of the other professional suites, had no access to them.  Was that a reason behind the launch of DeMark Prime? 

Tom DeMark – There were a number of catalysts that inspired us to offer our own indicator service.  Primarily, it was an effort to overcome the gypsies who were stealing our ideas and indicators and then in turn selling their pirated or pseudo DeMark indicator services over the internet.  In most instances, what they were offering was incorrect and had no similarity to the correct versions we were offering to institutional users.  We had to combat these thieves and their misrepresented facsimiles of the indicators. 

Paul Day – You have advised some of the most profitable money managers in the market.  Are there any traits they share in common?  Any gems of advice for the smaller independent trader? 

Tom DeMark – I have been fortunate to have associated with the best traders and titans of the industry. I advised many of the largest companies and funds.  I advised George Soros, Larry Tisch, Goldman Sachs, Leon Cooperman and many others. 

I have worked as an Executive VP for Paul Tudor Jones and for the past fifteen years as special advisor to Steve Cohen from SAC Capital.  I also work closely with John Burbank from Passport Capital, who is making a big impact upon the investment world.

I worked with Larry Williams and Welles Wilder on the retail side of the business. The exposure I have received from having the indicators appear on Bloomberg has expanded the audience and users internationally.

One thing that distinguishes the Steve Cohen’s, Paul Jones’ and George Soros' of the investment business from the average trader is their ability to control their emotions and also their ability to ‘manage’ money.  Having the right system or market approach is the least important of the three prerequisites for investment success – methodology, discipline and money management.

Paul Day – You probably have constant requests from people to assess their trading methodologies.  Are there any strategies that make you wince?
 

Tom DeMark – Yes! Many make me wince.  What I am always amazed at are those who are just beginning to explore mechanical trading techniques and choose to optimize moving average time periods to arrive at mechanical buy and sell signals.  Optimization is a ticket to disaster.  Markets either trend or are locked in trading ranges.  When they are in trends any time period will work and when in trading ranges none will as the time a moving average is exceeded when in a trading range is the best time to reverse one's position rather than hop aboard. 

Paul Day – I expect you often get asked why you aren't a billionaire sitting on a yacht somewhere in the Caribbean, but I sense your motivation has nothing to do with money.  Is getting it right more important to you than making a fortune?

(If so it is a very refreshing attitude and goes counter to the public's current perception of the financial community). 

Tom DeMark – I was queried once when giving a presentation in Washington D.C.  An individual in the audience asked ‘If you are so good why are you not rich?’  My impulsive response was ‘I am rich.’  It was greeted by laughter from the audience and in hindsight; I regretted blurting that out impulsively.  It was reflexive, but it did silence the person who was heckling me. To answer your question, yes we are comfortable but certainly not in the league of those to whom I have advised or worked with as an executive in the past. 

My role has been researcher and developer. Money has never been my motivation. I am a firm believer that once a person becomes an expert in his field it is obvious that money was not the motivator rather it was a passion and love for the subject.  I have never complained that I had to work and I do not really consider what I am doing is ‘work.’  I am fortunate that I consider it both my vocation and my avocation.  I have spent 7 days a week 24 hours a day doing what I love and I consider it a ‘gift from God.’  I am blessed and have wanted to share my research with others.  I have never been labeled as mercenary.  I donate all proceeds from books and from speaking to charities.  Unlike others, I derive no income from these sources. 

Paul Day – Lastly, rumor has it that you work around 20 hours a day.  How are you going to fill that time when you retire?  

Tom DeMark – I will never retire. I see my only option were I to retire is to carry on doing exactly what I am currently doing! Life is great and doing what one loves to do makes it even better.  Fortunately, my son TJ is well versed in the indicators and is the next best expert.  He also has business acumen and he runs the operation. Together with our new partners Steve Cohen and John Burbank, two of the all-time best traders, we have visions of much bigger and better things in the future. 

Paul Day – If you had have told me you were going to retire I wouldn’t have believed you. It has been a pleasure, Tom.  Thanks for your time.