Triple Screen Trading System – Part 1

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Triple Screen Trading System – Part 1

Dr. Alexander Elder devised the triple screen trading methodology in 1985, which seems more like a medical diagnostic exam than a financial trading approach. Although this is reasonable, the triple screen has nothing to do with the amount of actual monitors utilized. The reference to medicine, or “screening,” is not by chance: Dr. Elder worked as a psychiatrist in New York for many years before getting engaged in financial trading. He has produced hundreds of papers and books since then, including “Trading for a Living” (1993), and has spoken at numerous major conferences.

The Argument for Various Trading Methods

Many traders use a single screen or indication for each and every transaction. In theory, there is nothing wrong with using a single indication to make decisions. In reality, the discipline necessary in maintaining a single measure is connected to the trader’s discipline and is perhaps one of the most important factors of trading performance.

What if the indication you’ve picked is inherently flawed? What if market circumstances change and your single screen can no longer account for all of the possibilities that exist outside of its measurement? The issue is that, since the market is so complicated, even the most sophisticated indicators cannot function all of the time and in all market conditions.

Choosing Indicators

In a market upswing, for example, trend-following indicators increase and provide “buy” signals, whilst oscillators indicate that the market is overbought and give “sell” signals. Trend-following indicators indicate selling short in downtrends, whereas oscillators get oversold and give buy signals. Trend-following indicators are good in markets that are strongly going up or down, but they are prone to quick and abrupt fluctuations when markets trade in ranges. Oscillators are the greatest option inside trading ranges, but when markets begin to follow a trend, oscillators offer premature indications.

  Advantages of Data-Based Intraday Charts

Some traders have attempted to average the buy and sell signals generated by multiple indicators in order to find a balance of indicator opinion. However, there is a weakness with this method. If the number of trend-following indicators calculated exceeds the number of oscillators employed, the result will be slanted toward a trend-following outcome, and vice versa.

Elder created a strategy to address the shortcomings of simple averaging by combining the best of trend-following and oscillator approaches. Elder’s approach is intended to compensate for the shortcomings of individual indicators while also detecting the market’s underlying complexity. The triple screen trading method, like a triple screen marker in medical research, applies not one or two, but three distinct tests (screens) to every trading decision, which create a mix of trend-following indicators and oscillators.

The Problem of Static Time Frames

However, there is another issue with popular trend-following indicators that must be addressed before they can be employed. When applied to multiple time periods, the same trend-following indicator may provide contradictory indications. For example, on a daily chart, the same indicator may indicate an uptrend, give a sell signal, and indicate a downtrend on a weekly chart. With intraday charts, the situation is exacerbated even more. Trend-following indicators on these short-term charts may alternate between buy and sell signals on an hourly or even more regular basis.

To address this issue, break time periods into five-minute increments. There are 4.5 weeks in a month when monthly charts are divided into weekly charts. When comparing weekly to daily charts, there are precisely five trading days every week. Moving up a level, from daily to hourly charts, a trading day lasts between five and six hours. For day traders, hourly charts may be shortened to 10-minute charts (denominator of six) and then to two-minute charts (denominator of five).

  20 Rules Followed by Professional Traders

The essence of this factor-of-five notion is that trading choices should be evaluated throughout at least two time periods. Monthly charts should be used if you like to examine your trading choices using weekly charts. If you are going to day trade utilizing 10-minute charts, you should first look at hourly charts.

Time Management

After deciding on the time frame to utilize in the triple screen technique, the trader labels it as the intermediate time frame. The long-term time horizon is one order of magnitude longer than the short-term time horizon. Daily charts are used as intermediate time frames by traders who hold transactions for many days or weeks. Their long-term time periods will be weekly charts, while their short-term time frames will be hourly charts. Day traders will use a 10-minute chart as their intermediate time frame, an hourly chart as their long-term time frame, and a two-minute chart as their short-term time frame.

The triple screen trading strategy demands that the long-term trend chart be reviewed first. This guarantees that the trade follows the long-term trend while allowing for trade entry at moments when the market momentarily goes against the trend. When a rising market makes a temporary downturn, the finest purchasing chances are highlighted; when a falling market rallies momentarily, the best shorting possibilities are indicated. Weekly falls indicate purchasing chances when the monthly trend is upward. When the daily trend is bearish, hourly rallies present chances to short.

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