Modified TD Indicator-Based Market Timing Strategy for Stock Indexes

Introduction

The Modified TD Indicator Strategy is a technical analysis approach originally developed by Thomas R. DeMark, an executive vice president at Tudor Investment Corporation. Designed in the mid-1980s, it identifies potential trend reversals with high accuracy, making it popular among institutional investors. This article presents a customized version optimized for the A-share market, addressing limitations of the traditional TD indicator in Chinese markets.

Core Principles of the TD Indicator

1. TD Sequence vs. TD Combo

Two primary variants exist:

• TD Sequence: Simpler counting logic based on closing price comparisons.
• TD Combo: More complex rules incorporating highs/lows and additional conditions.

Both share the same foundational idea:

Market trends form from imbalances between buying/selling forces. The TD indicator spots exhaustion points where trends are likely to reverse.

2. Phases of the TD Indicator

A. Setup Phase

• Parameters: Interval T (e.g., 4 days) and consecutive days N (e.g., 6 days).

• Rules:

  • Downtrend Setup: Triggered if N consecutive closes are lower than the close T days prior.
  • Uptrend Setup: Triggered if N consecutive closes are higher than the close T days prior.

B. Countdown Phase

TD Sequence Method:

• Buy Countdown:

  • Count 1: Increment if today’s close < close 2 days prior. Target: M (e.g., 28).
  • Count 2: Increment if today’s close > close 2 days prior. Target: M/2.
• Sell Countdown: Inverse logic (close comparisons flipped).

TD Combo Method:

• Adds filters like lowest price and highest price thresholds.
• Counts increment only if specific conditions (a/b/c) are met.

Strategy Optimization for A-Shares

Key Adjustments

1. Parameter Tuning:

   • Optimal values for A-shares: T=4, N=6, M=28.

2. Stop-Loss Mechanism:

   • Track the lowest price during the countdown phase.
   • Exit positions if the next day’s low breaches this level.

Backtesting Results (2007–2016)

A. TD Combo (CSI 300 Index)

• Annualized Return: ~16%
• Max Drawdown: 24.8%
• Outperformed during major bear markets (2008, 2015).

B. TD Sequence (SSE 50 ETF)

• Annualized Return: 13.6%
• Max Drawdown: 16%
• More stable with smaller drawdowns.

Practical Application

Example: TD Sequence Setup

1. Downtrend Identified: 4 consecutive closes < 4-day-prior close.

2. Countdown Begins:

   • Black numbers (Count 1): Close < close 2 days prior.
   • Red numbers (Count 2): Close > close 2 days prior.
3. Buy Signal: When Count 1 hits M or Count 2 hits M/2.

👉 Explore advanced TD strategy optimizations

FAQ Section

Q1: Why use M=28 for A-shares?

A: Empirical testing showed this value balances signal accuracy and risk management.

Q2: How does TD Combo differ from TD Sequence?

A: TD Combo adds price extreme filters (lows/highs), reducing false signals but increasing complexity.

Q3: Can this strategy be applied to individual stocks?

A: Yes, but parameters may need retuning based on the stock’s volatility.

Q4: What’s the biggest risk?

A: Overfitting—always validate with out-of-sample data.

Conclusion

The Modified TD Indicator Strategy offers a systematic way to time market entries/exits in volatile markets like China’s A-shares. By combining rigorous backtesting with stop-loss rules, it achieves consistent returns while minimizing drawdowns.

👉 Learn how to implement this strategy in your portfolio