Discover the Triple Screen Trading System

Developed by Dr Alexander Elder, the triple screen trading system first appeared in 1986. It is considered as one of the Futures Magazine’s top 10 trading systems. It incorporates multiple trading indicators as a way to filter out the contradictory trading signals. According to Elder, there was no single indicator that correctly and consistently analyzed the intricacies of the financial markets.

As he maintained, different indicators can provide contradictory signals for the same market. The Elder Triple Screen trading system subjects any potential trade to three tests to solve such a problem. If a trade passes those tests offers, theoretically speaking, a better chance for profits than those which fail them.

Let us take a look at how this method works in detail and see how does triple screen trading works.

The Method Used for the Triple Screen Trading System

The name of the trading system tells that three screens are applied to any trade.

discover the triple screen trading system

These are as follows:

  1. First Screen – This screen analyses a time frame one order of degree larger than the chart that you are using to trade. The direction of the tide is thus identified with a trend indicator;
  2. Second Screen – To identify the wave that is the market movement contravening to the direction of the tide, this screen applies an oscillator to the chart that one wishes to trade. This way, one gets the view to achieve an optimal entry point;
  3. Third Screen – Lastly, this screen analyses, using a trailing stop, the ripple and looks for short-term breakouts in the course of the tide. The triple screening utilizes close stop-losses on open positions. For long positions, traders are advised to stop one tick below the low point of the previous or the current bar, whichever happens to be lower. The stop would go one tick above the high point of the previous or the current bar, whichever happens to be higher for short positions.

Triple Screen Summary of Trading Action

The Alexander Elder trading strategy utilizes multiple timeframes and a combination of indicators. To enforce a money management discipline, it uses a tight stop-loss. Below you will find the table that gives a summary of the action that one should take contingent on the combination of the intermediate and larger trend.

Discover the Triple Screen Trading System

A Simple Triple Screen System for Trading Multi Timeframes

Although the trading system was proposed as a strategy for stock trading, triple screen forex use is quite widespread in the market. It is essentially a system that follows a trend. However, the chief characteristic is that it analyzes charts at multiple timeframes.

The idea with Elder trading is that it looks to time trade entries to correspond with market pullbacks and corrections. Only when there is an agreement between the time frames and the signals between multiple screens does the strategy buy or sell. Let us take a look at the strategy with a few examples.

Choosing a Chart Setup

First, choose the chart that you wish to use. A typical Alexander Elder trader opts for a time frame that is between 3 and 5. This means that the period of the chart reduces from the longest to the shortest duration chart, by a factor of 3, 4, or 5. If we have a weekly long-range chart, divide by 4 for the tactical chart, and again by 5 for the execution chart.

Your trading goals should dictate your choice for the right chart. For instance, a longer range setup is ideal if you are a buy and hold, or a sell and wait for the trader. A shorter range set of charts is ideal for those who trade intraday.

Reading the Screens

Timing is of the essence with this strategy. There is no definitive buy or sell signal with a triple screen. Instead, it is a system of confirmations from a one-time frame to the next. This way, the evidence points to an appropriate time to enter a trend in the direction that the market is likely moving. This has its advantages and disadvantages. Since there are no rigid criteria, it means that one can fit in one’s own thinking into the strategy, and also make things simpler by utilizing fewer indicators.

When to buy

When a bull trend has just been corrected and is starting to turn up again is the ideal time to buy in the triple screen. Let us find out how this can be done.

Chart 1: Weekly

To understand, pull up the weekly chart and identify the markers. Look for the trend and confirm the same by checking the moving average line. In the chart below, we have a bullish trend.

For the pullback, one can use a combination of indicators such as the MACD and Force Index. Wait until the MACD line moves down from the oversold position, and the MACD slope begins to turn up again. After that, ensure that the Force Index is below zero. Other indicators can just as well be used for the same.

Chart 2: Daily

Now, let us take a look at the middle of the daily chart. For the Momentum, we can use any indicator to confirm whether or not the correction is completing. Basically, we are determining that the downward selling pressure is reducing from the correction. What this means is that the flow of profit-taking has hit a peak.

It is vital to ensure that this isn't the beginning of a new bear market. Caution is advised if the downward correction is predominantly strong. If the pullback is quite sharp, we would definitely wait until the new direction is fairly established for entering long.

[h3]Chart 3: Four Hourly[h3]

indications that the pullback is completing, and the market is approaching an oversold point. Once done, place orders as pending buy stop orders. In the case of a buy entry, only when the price rises above the current market level to the stop in level will a pending stop order execute. Place a pending buy stop order at the level once that entry is decided. Note that the chosen level ought to be somewhere around the mid-way mark of the corrective down wave. In the above example, it is at around 0.8618 for AUD/USD.

If the market falls, we do not enter the trade, and the order cancels. On the other hand, the order is automatically executed if the market rallies and rises above the entry point. Thus, we accumulate the entire position with each buy signal that the triple scalping system creates, up to a pre-defined risk limit.

The trade exits

For each order, there is generally no take profit defined. Rather, a ratcheting stop loss is set. As the market rises, the exit stop loss moves gradually upwards for a buy order. This is to ensure that the profit is locked in.

For a buy order, the stop loss only moves higher, never lower. The order stops automatically as soon as the market drops by the loss amount. This realizes either a profit or a loss. As mentioned, it is according to the pre-defined risk limits that the loss amount and the order sizes are set.

 Discover the Triple Screen Trading System

When to Sell

The process for selling is the same as given above, except in reverse. Rather than buying stop orders, we sell stop orders. A trailing stop loss is set on the sell order to exit the position with a buyback.

Diversification

The triple screen works best when it is diversified across various markets. Only a small amount is risked for every trade, but various trades are completed on non-related markets. Thus, the risk is spread thin, and even when a few trades end up going the wrong way, the system doesn’t collapse.

If you like this strategy, you might also be interested in this Low Spread Scalping Strategies

Conclusion

The Alex Elder trading strategy has garnered widespread popularity ever since its development. This is because it is suitable for different financial markets and is universal. The whole method is used to take a comprehensive look at an instrument. This provides the traders with the ability to determine the instrument's behavior on different timeframes and lets them find an entry within the main tend.

At the same time, it is essential to note that it is not enough to get a signal from just an oscillator. Adding other tech analysis signals such as price and action patterns, support, and resistance levels would be a wise move for a trader.

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