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Triple Screen Trading Technique – Alexander Elder

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Introduction

The Triple Screen methodology was developed by Alexander Elder in 1985 as a form of discretionary trading. However, there have been other experts who have tried to develop with some success automated trading systems using this trading system to trade in markets such as Forex.

 

This method is based on the careful selection of a triple time frame that allows the trader to make a reliable diagnosis of the main trend in the market that he is analyzing, so that he can take maximum advantage of the medium amplitude cycles and the erratic intraday movements with the objective to open positions in the market more safely.

 

In this trading technique the first screen is used to detect the amplitude and direction of the main trend. In the other hand, the second screen is used to catch the "wave of the market" ." And finally the third screen can be used to identify a break point in the market that allow to optimize the entry points to open a position.

 

According to Elder, the scaling relationship between these three time frames should be as close as possible to a factor of 5 or more. While this number has nothing in particular it seems that is the one that best approximates the results of other classic studies of trends made by Robert Rhea and Charles Dow. Thus, for example, the traders who work with daily charts should be use as the first screen a weekly chart in order to filter out the noise of the daily movements. For the third screen in this case it is best to work with 1 hour charts whose usefulness will be to refine the time when entering the market.

Trading Instruments

This trading technique can be used in any market including Forex.

Indicators

The traders can set different combinations of time frames depending on their trading style. However, the followers of daytrading can use the next combinations:

  • Combination 1: 120 minutes, 30 minutes and 5 minutes charts respectively.
  • Combination 2: 60 minutes, 10 minutes and 1 minute charts for more active traders.

For each screen (chart), Elder often use different technical indicators to confirm the trend in each of them and reinforce the signal. These indicators are the following:

  • Screen 1: The MACD and its histogram.
  • Screen 2: Short cycle oscillators in order to take advantage of counter trend movements that present the best opportunities to open a position in the market. In this case the best indicators are the stochastic oscillator, the %R Williams, the Elder-Ray and the Strength Index.
  • Screen 3:  Elder continues to use the oscillators as favorites indicators. Among these indicators he use the Strenght Index smoothed with a EMA (Exponential Moving Average) of 2 periods.

Trading System Rules

-If the first screen presents an uptrend and the second screen shows a movement against that trend, the trader should open a long position at the precise moment that third screen shows that the time is right.

  • If the first screen presents an uptrend and the oscillators of the second screen indicate an oversold market, the trader should open a long position if the oscillator of the third screen shows an oversold market too and the price is above the maximum of the day or the previous session.

-If the first screen presents a downtrend and the second screen shows a movement against that trend, the trader should open a short position at the precise moment that third screen shows that the time is right.

  • If the first screen presents a downtrend and the oscillators of the second screen indicate an overbought market, the trader should open a short position if the oscillator of the third screen shows an overbought market too and the price is below the minimum of the day or the previous session.
-If the first and second screen has the same direction, either an uptrend or a downtrend, the best recommendation is that the trader should wait for a better opportunity to enter the market.

Once we get into the market, we place protective stops according to the following rules:

  • If we open a long position, the stop loss should be placed somewhere below the minimum of the day or below the minimum bar (or candle) of the previous day, whichever is lowest. 
  • If we open a short position, the stop loss should be placed somewhere above the high of the day or above the high bar (or candle) of the the previous day, whichever is the highest. 
  • If the trade is developing in our favor, we can move the stop loss to break even. In this case, the rule states that we protect 50% of the pips gained. 
  • Traders that trade in the long-term, should remain on the market until the trend of the first screen change or the stop loss is executed. The trader must never move back the stop on the belief that the market is having only a correction, you should always protect the profits. 
  • In the case of traders that trade in the short-term they can use the oscillators of the screen  2 and 3 to enter and exit the market. For example, if the first screen shows a clear uptrend and the oscillator of the second screen is in the oversold area, the trader should open a long position which should be closed when the oscillator reaches the overbought zone.

Additional Notes About This Trading System

This trading technique of Alexander Elder is an interesting approach because it takes into account the different movements and market trends presented in different time frames. Usually, most traders use just one screen and one or two indicators to trade in the market.

The problem is that a single chart and indicator can not cover all eventualities that may have the market. Even the most advanced indicators are unable to work all the time because the market is very complex.

The advantage of the Elder trading system is that the market undergoes not one, not two, but three unique tests, or screens, to every trading decision. These tests are formed by a combination of trend-following indicators and oscillators. The system is designed in such way that it counteract the failures of individual indicators and at the same time it serves to detect the market's inherent complexity.

Example of the application of the technique of the triple screen

In this case we assume that we trade based in 1 day charts so the settings of the three screens are as follows:

First Screen

This is the screen 1 in which we use a weekly chart and a MACD histogram which are used to detect the amplitude and direction of the trend . In this case, this trend  seems to be in a downtrend but apparently it is near to an important support which could turn the trend at least momentarily.

Second Screen

This is the screen 2 in which we use a daily chart which serves to catch the "wave of the market". In this case we use short-cycle oscillators that allow to take advantage of counter-trend movements. In this chart we used a stochastic oscillator, the %R Williams and the Strength Index which apparently show a possible change in  the trend  that could  be simply a correction of the larger trend. This signal is shown especially by the stochastic.

Third Screen

Finally, the third screen is a 1 hour chart which uses as the main indicator the Force Index to catch the "tip of the wave". In this case, this indicator is smoothed with a EMA of 2 periods. This chart is used by the trader to decide at what point he will enter the market and where he will fix the stop loss and the take profit points of the position. As the chart shows, the market does not have a clearly defined trend and it is waiting the appropiate moment to produce  a breakout in any direction, although apparently it tries to go in a rising trend as shown in the second screen, that is presenting some signs of a change in the prevailing trend . However, because the Force Index is practically zero, the trader must wait for the market to make the final break before opening a position.

 

 

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