Pivot points are essentially resistances and support and there are several pivot point calculators that have been developed to determine these pivot points. However, almost all pivot point calculators are lagging indicators and are handicapped by their failure to forecast future trends.
Traditionally resistance and support lines are drawn by connecting tops and bottoms and extending the lines forward to forecast future price movements. However, this traditional method is not objective and much more ambiguous. If you ask two different people to draw the resistances or support lines, you will have two different trend lines. This is because each individual has a different way at looking at things. The Tom Demark method is a simple way of more accurately drawing the trend lines i.e. the support and resistance lines.
With Tom Demark’s method, drawing of the trend lines becomes more objective and accurately determines which points to connect to come up with the support and resistance lines. In contrast with other pivot point calculators which can draw up only horizontal lines representing resistance and support points, DeMark’s method determines which points to connect to represent the resistances and support as well as to forecast the future price direction.
The Tom Demark method puts more weight on the most recent data than the price dynamics of the previous trading session. The trend lines are calculated and drawn from right to left instead of the traditional left to right method employed by other pivot point calculator. And, instead of tagging resistances and supports as R1 and S1, De Mark tagged them as TD points calling the line connecting them as TD lines.
DeMark uses what he calls as a criteria of truth which is essentially the basic assumptions upon which the TD points are accurately determined. The DeMark criteria of truth are as follows:
- Demand price pivot point is essentially the low of the current session’s price bar must be lower than the closing price of the two prior bars before it.
- Supply price pivot point is essentially the high of the current session’s price bar must be higher than the closing price of the two prior bars before it.
- When calculating the TD line rate of advance for the Demand price pivot point, the closing price of the next bar must be higher than the TD line.
- When calculating the rate of fall of TD-line for the Supply price pivot point, the closing price of the next bar should be lower than the TD-line.
The criteria set above may be a bit confusing at the onset but they are meant to filter out the drawn lines based on the DeMark formula in calculating resistances and supports or the pivot points:
The DeMark formula is as follows:
DeMark uses a magic number X to calculate the upper resistance level and the lower support.
He calculates X as follows:
If Close < Open then X = (High + (Low * 2) + Close)
If Close > Open then X = ((High * 2) + Low + Close)
If Close = Open then X = (High + Low + (Close * 2))
Using X as reference point, he calculates the resistance and support as follows:
Upper Resistance level R1 = X / 2 – Low
Pivot Point = X / 4
Lower support level S1 = X / 2 – High