Statistical testing of DeMark technical indicators on commodity futures

In this paper, we examine the performance of three DeMark indicators (Sequential, Combo and Setup trend), which constitute specific implementations of technical analysis often used by practitioners, over twenty-one commodity futures markets and ten years of daily data. Our work addresses price behavior following new entry signals by studying whether, for short holding periods, the entry signals generated by these indicators can time the market moves and suggest the right side of the market (long or short). For example, we want to know how long we should hold or delay a trade before the price is expected to move significantly. The signals are sparse, as they mostly suggest entering the market between one and five times per year. To adjust for the limited number of total days in which the trade signals are in-the-market, we generate the distributions of multiple performance metrics (mean return, profit factor and risk–return ratio) over different trade holding horizons, and compare them with their randomized versions, which have the same number of entry signals and the same number of holding days. The rolling strategy, which creates continuous futures data from separate contracts, plays a role in evaluating the statistical performance of these indicators. Overall, this paper gives more clarity to the predictive performance of these indicators as well as practical guidance on how to use them in a trading environment as generators of market entry ideas.