The basic idea behind the Triple Screen system is that in order to develop a successful strategy you need a strategy that works both in a trading environment as well as in a ranging or consolidation zone. The Triple Screen system also makes use of the multiple time frame analysis because it starts first analyzing the higher time frame, i.e. weekly chart and then we need to downgrade our charts to the daily chart and so on.
Indicators Used in Triple Screen trading System
Under the Triple Screen trading system we need to utilize three different time frames:
- Long-term time frame, i.e.: weekly chart.
- Intermediate time frame, i.e.: daily chart.
- Short-term time frame, i.e.: 1-hour chart.
How to use the Triple Screen Trading System?
First screen - long-term time frame is used to identify the big picture trend and that’s the first place where traders should look to establish a bias. In order to identify the trend, we can use trend-following indicators and Alexander Elder recommends using the MACD indicator.
Dr. Alexander Elder uses quite an easy way to read the trend as follows:
- If the MACD histogram is above the zero lines, we’re in a bullish trend.
- If the MACD histogram is below the zero lines, we’re in a bearish trend.
Second screen - daily chart of the Triple Screen Strategy and it is used to gauge daily swings against the weekly trend.
For this purpose, Dr Alexander Elder recommends using oscillators to spot overbought and oversold conditions in the daily retracements. For example, if the weekly chart is bullish the Triple Screen system will focus on the daily chart only on the bearish retracements thus looking for oversold conditions in the market.
Alexander Elder recommends using the stochastic indicator to spot oversold and overbought conditions. In our example, we have spotted that starting from September 2016 the weekly trend is bearish. Based on the Triple Screen system we should look to detect on the daily chart overbought conditions in the market.
Third screen - of the Triple Screen system is used for timing your trade after you have identified the long-term trend and after you have detected the overbought or oversold condition on the daily time frame. For this purpose, Alexander Elder recommends using the 1h chart.
You don’t have to use any type of indicators for the third screen simply studying the price action to time the market is enough to find a good entry point. The third screen is also called the trailing stop method.
In our example, we should be looking for selling signals on the 1 hour time frame. A great example of price action is the pin bar which shows rejection and reversal, the bigger the pin bar the better.
The Triple Screen system is, in essence, a trend following system because at its core trading principles it always follows the trend. By using a multiple time frame approach to trading, first you can have a better understanding of where the market is headed and secondly, you can better time your entry. The same Triple Screen principles can be applied to different time frames if you’re a short-term trader. This way you can suit the Triple Screen system to your own trading style.