This strategy uses 3 screens for monitoring the price movement, and each of them shows a different time frame. Most traders normally use a single screen to monitor price charts and their trades. Using a single frame is enough to make the decision, but the use of more than one screen can be useful to avoid the conflict among indicators.
Let's say you use both types of indicators. At the uptrend market, the trend indicator shows a signal to buy. However, the oscillator indicator shows that the price is overbought so a sell entry should be in order. Conversely, for the downtrend market, a sell signal from the trend indicator can happen at the same time with an oversold condition signaled by an oscillator.
This kind of conflict does happen and often leads to misinterpretations in the decision-making process of opening a trade. The extremely complicated and unpredictable market conditions are what causes the conflict between different types of indicators. If the trend is strong, signals from the trend indicator would follow the direction of the trend. However, if the market condition changes into the sideways ranging condition, the trend indicator might be difficult to read and this is usually when the oscillator would be more accurate.
Yet, it is hard to know certainly when the market condition will change. Many traders add other indicators as a means of confirmation, but it doesn't guarantee accuracy. To overcome this weakness, a triple screen trading strategy could help you. Did you know? A trend indicator can show different signals if it is used in different time frames. For instance, a trend indicator can show a buy signal in a daily chart, but the signal in the weekly chart can favor a short position.
The thing is, the smaller the time frame is, the more extreme the price movement is. Therefore, signals in small time frames are usually very temporary and can't be regarded as the general outlook for the price movement. As a solution, Dr. Elder divides the time frame with factors 5 to 6. The monthly time frame becomes 4. The strategy to open and close the trades is based on the smallest time frame.
So if you want to decide in a weekly time frame in this case 4. If you use a minute time frame, you must also consider the hourly time frame. In a triple screen trading strategy, the main time frame is called the intermediate time frame, the higher time-frame is named the long-term time frame, and the lower time frame is defined as the short-term time frame.
The trend is determined by the long-term time frame, and the signal to enter the market happens if the signal in the intermediate time frame trend is opposite to the long-term time frame. For example, if a bullish weekly trend happens, it means the signal for doing buy. It is because the price movement at the 5-day time frame tends to head lower. According to the analysts that observe the price market throughout the history data, there are generally three types of market trends, the long-term trend in the years' interval, the middle-term trend in months interval, and a short-term trend in a less-than-a-month interval.
Robert Rhea, a technical analyst, mentions those three trends as "tides" for the long-term, "waves" for the middle-term, and "ripples" for the short-term. In the last century, trading by following the long-term tides was considered one of the best strategies. If a trader wanted to enter and exit the market, he ought to follow the middle-term waves, while the short term ripples were rarely noticed.
However, with the increasing amount of traders in the world today, the market has become more complicated. Nowadays, many traders are also following the middle and short-term using different time frames. If you plan to hold a trading position for a few days or weeks, you should concentrate on the daily chart as your intermediate time frame.
The long-term time frame is weekly and the short-term time frame is hourly. But if you are likely to hold positions for a maximum duration of an hour, concentrate on a minute time frame with an hourly chart as the long-term time frame and a 2-minute chart as the short-term time frame.
The long-term tides are fundamental in making the trading decision. First, you should analyze the long-term time frame, which is a level above the intermediate time frame. The long-term time frame is the first screen from the triple screen system. If your main time frame is a daily chart , you must get the 5-day time frame and start to analyze the weekly time frame too. By using Robert Rhea's term, if the long-term trend is on the high tide, then the weekly trend is bullish.
Consequently, the moment to enter the market is when the trend wave is on the intermediate time frame 5-day goes lower. On the other hand, when the long-term trend is on the low tide or bearish, it means the moment to go short is when the price in the intermediate time frame heads higher. Traders normally concentrate on the daily chart with only one indicator that is based on the trend direction from the weekly time frame long term time frame. For example, when the weekly time frame trend increases, the traders only focus on the buy signal on the daily chart without accounting the probability of the sell signal.
The price movement on the intermediate time frame is not observed through a trend indicator such, but with an oscillator. The basic characteristics of the oscillator indicator are showing the buy signal when the price market falls to a certain extent oversold area and the sell signal when the price market rises to a certain degree overbought area. Those signals are shown like waves that show the entry moments. Four oscillator indicators are usually applied in this trading strategy are as follows:.
The indicator is devised by Dr. Elder for measuring the bullish and bearish power in using the Moving Average. In Dr. But if it is under the 0. If the indicator is used for the main time frame of the triple screen system 5-day time frame , and the MACD histogram at the weekly time frame forms a slope to the top or bullish, you can plan to open a buy position when the Force Index is in a negative area with an upside pullback momentum.
The buy position should be opened above the highest level on that day. In this case, you can use a stop order buy stop to wait for confirmation. The stop loss can be placed on the lowest level that day or the day before, depends on which one holds the lower price.
If the trend direction is confirmed, your buy order will be executed. However, if the signal is not confirmed and the price does not trigger the buy stop order, your position will not be executed. The exit level can be set manually when the trend in the long term time frame weekly has moved in the opposite direction.
Also, it can be set manually when a bearish divergence happens in the main time frame daily. The signal shows that the upcoming trend is changing from bullish to bearish. The second type of oscillator used on the second screen is Elder Ray. The indicator is designed by Dr. Elder based on the bullish and bearish power in the market. The bullish power measures the market's ability to push the price above the average range at the moment, while the bearish power measures the market's ability in pushing the lower price from the average range.
By using a trend indicator such as MACD in the long-term time frame, you can identify the trend direction in the long term. The Elder Ray indicator is used for deciding the entry moment. Since that time, he has written dozens of articles and books, including "Trading for a Living" and has spoken at several major conferences. Many traders adopt a single screen or indicator that they apply to each and every trade.
In principle, there is nothing wrong with adopting and adhering to a single indicator for decision making. In fact, the discipline involved in maintaining a focus on a single measure is related to the trader's discipline and is, perhaps, one of the main determinants of achieving success as a trader. What if your chosen indicator is fundamentally flawed? What if conditions in the market change so that your single screen can no longer account for all of the eventualities operating outside of its measurement?
The point is, because the market is very complex, even the most advanced indicators can't work all of the time and under every market condition. For example, in a market uptrend, trend-following indicators rise and issue "buy" signals while oscillators suggest that the market is overbought and issue "sell" signals.
In downtrends, trend-following indicators suggest selling short, but oscillators become oversold and issue signals to buy. In a market moving strongly higher or lower, trend-following indicators are ideal, but they are prone to rapid and abrupt changes when markets trade in ranges. Within trading ranges, oscillators are the best choice, but when the markets begin to follow a trend, oscillators issue premature signals.
To determine a balance of indicator opinion, some traders have tried to average the buy and sell signals issued by various indicators. But there is an inherent flaw in this practice. If the calculation of the number of trend-following indicators is greater than the number of oscillators used, then the result will naturally be skewed toward a trend-following result, and vice versa. Elder developed a system to combat the problems of simple averaging while taking advantage of the best of both trend-following and oscillator techniques.
Elder's system is meant to counteract the shortfalls of individual indicators at the same time as it serves to detect the market's inherent complexity. Like a triple screen marker in medical science, the triple screen trading system applies not one or two, but three unique tests screens to every trading decision, which form a combination of trend-following indicators and oscillators.
There is, however, another problem with popular trend-following indicators that must be ironed out before they can be used. The same trend-following indicator may issue conflicting signals when applied to different time frames. For example, the same indicator may point to an uptrend in a daily chart and issue a sell signal and point to a downtrend in a weekly chart.
The problem is magnified even further with intraday charts. On these short-term charts, trend-following indicators may fluctuate between buy and sell signals on an hourly or even more frequent basis. In order to combat this problem, it is helpful to divide time frames into units of five. In dividing monthly charts into weekly charts, there are 4. Moving from weekly charts to daily charts, there are exactly five trading days per week.
Progressing one level further, from daily to hourly charts, there are between five to six hours on a trading day. For day traders , hourly charts can be reduced to minute charts denominator of six and, finally, from minute charts to two-minute charts denominator of five. The crux of this factor-of-five concept is that trading decisions should be analyzed in the context of at least two-time frames.
If you prefer to analyze your trading decisions using weekly charts, you should also employ monthly charts. If you day trade using minute charts, you should first analyze hourly charts. Once the trader has decided on the time frame to use under the triple screen system, they then label this as the intermediate time frame.
The long-term time frame is one order of five longer; the short-term time frame is one order of magnitude shorter. Traders who carry their trades for several days or weeks will use daily charts as their intermediate time frames. Their long-term time frames will be weekly charts; hourly charts will be their short-term time frame.
Day traders who hold their positions for less than an hour will use a minute chart as their intermediate time frame, an hourly chart as their long-term time frame and a two-minute chart as a short-term time frame. The triple screen trading system requires that the chart for the long-term trend be examined first.
To try and solve this problem, the Triple Screen trading system subjects every potential trade to three tests. The trades that pass all three tests should theoretically offer better chances for profit than those that fail one or more of the tests.
So how does this method work in detail? Let's take a look! It's a generally-accepted piece of theory in the field of technical analysis that trend-following indicators don't work well when the market is range-bound, while oscillators don't perform well in trending markets. In a range-bound market, oscillators will perform well, however, and trend-following indicators are naturally-suited to trending markets.
The Triple Screen trading system combines trend-following indicators with oscillators in a way that is designed to take advantage of their strengths, while filtering out those occasions when they perform badly. He also suggested the Stochastic and the Williams Percent Range indicators as oscillators that would work well with the system. Another challenge when it comes to conflicting signals is that a trend really depends on which time frame you are looking at. For example, if you are looking at a daily chart, the trend may be up, but when you look at a four-hour chart, it may be down.
The Triple Screen trading system dictates that you consider three trend lengths, a concept that dates all the way back to Dow theory. The intermediate trend should be for the time frame you are aiming to trade with. The system was originally designed to use a daily chart for the intermediate time frame. The long-term trend can be seen on a chart of one-magnitude greater than the intermediate time frame.
For example, if you are aiming to trade on a daily chart, the long-term trend would be governed by a weekly chart. The short-term trend would be one order of magnitude shorter. In our example, this would be a four-hour chart.
The concept of these different time frames play a part in the Triple Screen method, as we will discuss in the next section. Did you know that Admiral Markets offers traders the number 1 multi-asset trading platform in the world - completely FREE!?
As the name of the system suggests, there are three screens applied to each trade. The three screens are as follows:. The Triple Screen trading system uses tight stop-losses on any opened position. Elder recommended for long positions that you use a stop one tick below the low of the current or previous bar whichever is lower.
For short positions, the stop would go one tick above the high of the current or previous bar whichever is higher. The first screen looks at the bigger picture. As we noted above, this is performed using a trend indicator on a chart that is one order of magnitude longer than the time frame on which you wish to trade. The original Triple Screen trading system used the MACD indicator for identifying the direction of the larger trend on a weekly chart. You can use whichever trend indicator you feel is best, however.
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Once the first screen identifies the direction of the tide, this is the only direction in which you will be allowed to trade when looking at your intermediate chart. So if your trend indicator signals that it is an uptrend, you can only buy.
If it says the tide is flowing in the direction of a downtrend, you can only sell. Once we know the direction of the tide, we are looking for a wave in the contrary direction on our intermediate chart that will give us a beneficial entry. Let's suppose that you are looking at a daily chart as your intermediate time frame, and the weekly chart shows that the larger trend is upward.
You are now looking for a daily decline which would provide you with an advantageous opportunity to buy the market. We would do this by searching for a buy signal from our oscillator of choice on the daily chart. Any sell signals in this case would be ignored because the uptrend from the first screen has already filtered those out.
We move to the third screen once we get agreement from the first and second screen: that is, when the larger trend is up, and an intermediate decline has generated a buy signal from our oscillator, or when the larger trend is down and an intermediate rally has generated a sell signal. The third screen is a technique using a trailing stop to determine the specific entry point.
If we are aiming to go long in the market with a daily chart used in the second screen, we use a trailing buy-stop one tick above the high of the previous day. If we are aiming to go short, we use a trailing sell-stop one tick below the low of the previous day. Let's suppose that the weekly trend is up, and a daily decline has issued an oversold signal from your oscillator i.
You would then place a buy stop one tick above the high of the previous day. If the market resumes its uptrend and hits your stop, you will go long on the market. If the market continues to decline, your stop will be deactivated.
You would then trail your stop by dropping it to one tick above the high of the day just passed. You would keep trailing until activated, or until you see the weekly trend change direction. As the system was originally designed to use weekly charts for the tide and daily charts for the wave, those will be the time frames we'll use as an example. The slope of the MACD histogram, which appears beneath the main price chart, indicates to us the trend of the tide.
An upward slope suggests an uptrend, and a downward slope suggests a downtrend. A key buy signal is when the indicator turns upward from beneath the centreline. A key sell signal is when the indicator turns downward from above the centreline. We can see in the graph below that the MACD crosses up above the centreline. We'll use this period for our example and proceed to apply our second screen. We are using a daily chart for our intermediate time frame. The second oscillator is the Stochastic oscillator, using default values.
The Force Index displays buying opportunities when it falls below its centreline, and selling opportunities when it rises above the centreline. The Stochastic oscillator displays buying opportunities in oversold areas below 30 and selling opportunities in overbought areas above If entry signal does not appear during the Signal from the Wave screen or even during the Uptrend state of the Tide Screen trader should cancel or Pending Orders and wait for another signal.
The strategy allows several exit rules. Usually, Stop-Loss set with the help of the Entry Screen. Nevertheless, the trader can regulate the risk by switching Stop Loss rules among the three screens. These rules are listed for the Buy signal, for the Sell signal rules should be vice versa. Take Profit is the desired level of profit and must correlate with Stop Loss level. Here is the example of the Short trade on the Long-Term combination of the screens.
Downtrend detected on the Weekly Screen. Stochastic gives Sell signal on the Daily Wave screen. On the Entry, screen trader uses Sliding Order technique to enter the trade. Early exit made by the crossing rule on the Entry screen. Indicator MultiSymbol Triple Screen Trading System is used to trade on multiple currency pairs and monitors the signals from three time periods at once for 30 currency pairs and provides information in a graphical form on the same graph.
Trading Systems. Many traders, while getting signals on low time-frame does not even realize, that they are trading against the market, which, according to Elder is the most dangerous mistake. In this article, we will describe a classical version of the strategy. Wave or Middle period screen is suited with Stochastic Oscillator to determine rebounds; one should consider only signals in Trend direction.
Determine trend direction on the Tide Screen. Determine trade signal with the help of stochastic on the Wave screen. Consider, that during Uptrend we only interested in Buy signals and during Downtrend we only seek for Sell signals: Buy signal: Stochastic lower than 20 level and crosses signal line from bottom to top.
Sell signal: Stochastic higher than 80 and crosses signal line from top to bottom. When there are active Sell or Buy signal, the trader needs to concentrate attention on the Entry screen and determine correct entry point in the direction of the given signal.
The triple screen system works with a trend following (momentum) indicator on the first screen, such as a simple moving average. It confirms the. This approach helps a trader to achieve a large profit with the least risk. The “three screens of Elder” system combines trend indicators and opposite. The triple screen trading system is based on employing the best of both the trend-following indicators and oscillators to make trading decisions. Traders are.